The 16-year-old is the youngest person to be chosen by the magazine in a tradition that started in 1927.
Speaking at a UN climate change summit in Madrid before the announcement, she urged world leaders to stop using "creative PR" to avoid real action.
The next decade would define the planet's future, she said.
Last year, the teenager started an environmental strike by missing lessons most Fridays to protest outside the Swedish parliament building. It sparked a worldwide movement that became popular with the hashtag #FridaysForFuture.
Since then, she has become a strong voice for action on climate change, inspiring millions of students to join protests around the world. Earlier this year, she was nominated as a candidate for the Nobel Peace Prize.
At the UN Climate Conference in New York in September, she blasted politicians for relying on young people for answers to climate change. In a now-famous speech, she said: "You have stolen my dreams and my childhood with your empty words. We'll be watching you."
Reacting to the nomination on Twitter, the activist said: "Wow, this is unbelievable! I share this great honour with everyone in the #FridaysForFuture movement and climate activists everywhere."