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To have AI generate images for you (or anything else, really), you need to first train that AI on some set of images. Usually those images are not something that people buy from artists, but... just take. For free. The generated images then resemble the style and content of the training material. That's how AI works.
The problem right now is that AI is completely not regulated by law, so technically you could take your favourite artist's music (paying them nothing), train an AI, generate BGM for your game from that and start selling it. That BGM would very much resemble the music you like so much, but obviously would not be the same. Now, do you owe something to those whose music you used to train the AI? Up to you to decide, so far, because - again - not regulated by law. Morally dubious, IMO.
Some popular artists will make tons of money passively with the rights on "their very own style which they definitely created out of nowhere without copying and combining stuff like AI does" but thats it, many non popular artists would lose their job anyways. As i undertand they force this opinion in both left and right wing circles
Aside from the talk about AI, it needs to be recognised that AI tools did not make the 3D models, animate them or do the other many myriad tasks that entail game design. Palworld is a solid game in and of itself and it should be celebrated that we've gotten a game this good, even in an early access phase, at a point where the industry seems to be flagging and growing stagnant because the big AAA devs refuse to innovate and instead churn out game after game that is pretty much the same thing but with better graphics.
Palworld may be legally dubious but it will doubtless provide the proverbial kick in the teeth Nintendo direly needs to wake up, realise there is a market outside of the Switch and many, MANY Pokemon fans who were enraptured by the original games but put off by Gamefreak's lazy design ethos. At this point if Pokemon wants to thrive as it once did, or indeed as it could do, it needs to expand beyond the quaint little handheld RPG we all used to play back in the early thousands. The IP needs to be given to people other than Gamefreak so that we can get the weird, wacky and in some cases darker and more adult themed games that older fans have been dreaming of for years now, just imagine how much better Nintendo could likely make a game like Palworld due to it's design talent and resources!
So yes, the concept art for the Pals was likely made through the use of 'AI' tools (read: programming and design tools trained and conditioned by human interaction and input). Do we really care if it results in something like Palworld that can provide a net bonus to the gaming industry and give gamers the games they actually want? Nope.