Suppliers' AI adoption and customers' carbon emissions: firm-level evidence from China

Using panel data of Chinese listed firms from 2010 to 2021, we investigate whether and how suppliers' artificial intelligence (AI) adoption affects their customers' carbon emissions. We find that increased AI adoption by supplier firms reduces their customers' carbon emissions, and this result is robust to various tests. The main mechanisms are the innovation chain (measured by green innovation patents) and the capital chain (based on trade credit). Cross-sectional analyses reveal that the negative impact is more pronounced for customers boasting higher ESG score, better absorptive capacity, lower resource endowments, or stronger coordination with the suppliers. We also show that as firms adopt more AI, their own carbon emissions rise, but the carbon emissions of their downstream customers across multiple tiers fall. Our findings suggest that a firm's position in the supply chain determines whether AI positively or negatively impacts its carbon emissions.