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The digital economy (DE) plays a crucial role in green innovation (GI) and green development as a new economic form. Based on the panel data of 274 Chinese prefecture-level cities from 2011 to 2019, this paper constructs a comprehensive DE index and conducts two-way fixed effect regression to explore its impact on GI capabilities and examines the mediating effect of industrial structure transformation and upgrading. The research results show that: (1) The development of the DE has significantly improved the GI capability of cities. (2) In terms of space, the development of DE and GI ability development in eastern cities outperform that in central and western regions. However, the development of eastern cities is almost saturated and slow, while the development of central and western cities is faster. (3) The DE has a significant role in promoting GI capabilities in the central and western regions. Although the eastern region has a positive impact, it is negligible. In terms of urban scale, the DE of the large, medium, and small cities positively affects GI capabilities to the effect. (4) The transformation and upgrading of the industrial structure mediate the relationship between the DE and GI. Based on the above conclusions, relevant suggestions for improving GI capabilities around the development of the DE and industrial transformation and upgrading must be devised.