I have one ipod, and thousands of CDs. Is downloading perfectly green? Hell no, but I do think it's greener than shipping/making CDs, LPs, etc. Manufacturing, shipping, and displaying a CD + me driving to the store to get it, vs. a download: seems clear.
I think we're headed for more of a cottage industry model for CD manufacturing in any case. I have an iPod 32gb Touch that was given to me. I like it. But one good drop and it all goes away. Then I'll have to have had another device or two as back-up.
In reality, like so many technologies, these things are not so much replaced as they become another layer in the great swelling techno-midden. I was recently in rural Washington state and came across displays of commercial music cassettes in gas stations!