AI's Green Revolution: Reducing Carbon Emissions in Manufacturing

By Dr. Sampath LonkaReviewed by Susha Cheriyedath, M.Sc.Sep 13 2023

In the industrial era, the world's focus has shifted towards the critical issue of carbon emissions. Among the many sectors contributing to this problem, the manufacturing industry is a significant carbon emitter. It must strive for net-zero emissions to combat climate change and foster sustainability.

Recent advancements in artificial intelligence (AI) are reshaping industries and offering avenues for carbon reduction. In a recent paper published in the journal Processes, researchers examined the correlation between the AI index and carbon emissions using a fixed-effects regression model.

Background

Since the dawn of the Industrial Revolution, global warming has gained attention. This forced countries to adopt policies for mitigating climate change and promoting sustainable development. Carbon emissions are the main drivers of climate change, and reducing these emissions is critical for environmental preservation. Emerging economies often see rising greenhouse gas emissions alongside economic growth.

The continuous advancement of science and technology has enabled industrial upgrades, economic shifts, and energy restructuring. The Industrial Revolution spurred economic growth, energy consumption, and environmental pollution. Intelligent technology enhances efficiency and reduces environmental impacts. Enterprise-based operations produce energy-related carbon emissions. As AI revolutionizes innovation, production, and operations, it helps to reduce carbon emissions through structural optimization and green innovations. AI also enhances energy efficiency and green supply chain transitions. However, debates persist, with some arguing AI encourages energy consumption and emissions.

Proposed hypotheses

In recent years, the world has seen a surge in digital transformations, with AI playing a pivotal role in green economic development. The adaptability and ubiquity of AI bring forth technological revolutions, reducing energy consumption, resource waste, and carbon emissions in high-energy-consuming industries. AI optimizes production processes, lowers fossil fuel usage, and enables green manufacturing. It predicts and monitors carbon emissions, fostering environmental sustainability. Moreover, AI enhances supply chain operations, creating eco-friendly supply chains and markets. Hence, researchers proposed Hypothesis 1 (H1): AI integration reduces carbon intensity in manufacturing firms.

Green technological innovation further complements AI's impact. It strengthens the connection between AI and carbon reduction, attracting green talent and resources. Thus, Hypothesis 2 (H2) proposes that green technological innovation enhances AI's role in carbon reduction. Green management innovation emphasizes environmentally friendly initiatives, compelling AI adoption, and improving productivity. Hypothesis three (H3) posits that green management innovation fortifies AI's carbon reduction effect. Finally, green product innovation, aligned with AI, minimizes waste, costs, and emissions, leading to a greener economy. Hypothesis 4 (H4) states that green product innovation amplifies AI's impact on carbon emission reduction.

Exploring the data for modeling

Data Sources: To ensure data availability, the research focused on Chinese A-share listed companies spanning 2012 to 2021, yielding a dataset of 9547 research samples. Data about corporate patents was sourced from the China Research Data Service Platform (CNRDS), while data concerning green management innovation was extracted from the China Stock Market and Accounting Research (CSMAR) database. Additional data were obtained from the Wind Economic Database (WIND), listed companies' websites, environmental sector websites, and the social responsibility and annual reports of these companies.

To enhance data quality and accuracy while minimizing interference from extraneous factors, special treatments, and special transfers were applied. To mitigate the influence of outliers, continuous variables were weighted at the one percent and 99 percent levels. To address heteroskedasticity, major continuous variables were logarithmized. Lastly, to address covariance issues, continuous variables involved in interaction terms were centered.

Types of Variables: Carbon emission intensity is considered a dependent variable. It is a traditional measure of carbon performance and encompasses direct and indirect emissions from fossil fuels and production processes. It is calculated as the natural logarithm of the sum of combustion and escape emissions, production process emissions, waste emissions, and emissions due to land use transformation.

An AI index for enterprises was constructed by analyzing text content, extracting AI-related keywords, and determining word frequency from annual reports. This variable is considered an independent variable in the modeling. Three moderating variables were considered, including green technological innovation, green management innovation, and green management innovation. The level of green technological innovation within enterprises is assessed by calculating the ratio of green invention patent applications to the total number of invention patent applications.

Green management innovation is assessed through ISO 14001 certification, recorded as 1 for certified firms and 0 otherwise. The variable of green product innovation is gauged using research and development intensity as an indicator, reflecting the level of green product innovation in enterprises. Seven control variables were considered, including firm size, gearing ratio, profitability of assets, state-owned enterprise status, total asset turnover, return on net assets, firm age, and years.

Proposed model and analysis

To investigate the impact of AI on carbon emissions (H1), a fixed-effects model was constructed. In this model, the carbon intensity of firms is regressed on AI levels and control variables. To test Hypotheses two to four, interaction terms between moderating variables and corporate AI technology were added to the model. This allowed for an examination of the moderating role of these variables in the relationship between AI and carbon emissions. The coefficients of the interaction terms were analyzed to validate these hypotheses.

The fixed-effects regression model was employed following the Hausman test. Researchers concluded that corporate AI levels negatively impact carbon emissions intensity, and green technology, management, and product innovation levels strengthen the inhibitory effect of enterprise AI development on carbon emissions.

Conclusion

In summary, as climate change intensifies, the manufacturing industry's substantial carbon emissions have attracted considerable attention. The current study examined data from manufacturing companies listed on China's A-share stock exchanges from 2012 to 2021, using a fixed-effect model to investigate how corporate AI affects carbon emissions intensity. Moreover, it explored how green technological innovation, green management innovation, and green product innovation influence the relationship between AI technology and carbon emissions reduction.