How Circular Economy Innovation Can Backfire on the Environment: Quantifying the Rebound Effect of the Textiles and Clothing Sector

ABSTRACT Circular economy ( CE ) is championed as a sustainability solution, promoting reuse, recycling and resource efficiency to reduce environmental harm. However, CE innovations can trigger a rebound effect (RE), where lower costs stimulate higher consumption and production, paradoxically negating sustainability gains. This study applies a multi‐region, multi‐sector dynamic computable general equilibrium (DCGE) model to quantify the rebound effect triggered by CE innovation in the textile and clothing (TC) sector, the second most polluting industry. Our findings reveal a 155% rebound backfire, showing that CE innovations in the TC sector may exacerbate rather than mitigate environmental pressures. This challenges the assumption that CE alone can drive sustainability and underscores the need for complementary policies. As an extension, we look at complementary policies to ensure that CE strategies deliver genuine sustainability benefits. One explored policy is a uniform Pigouvian tax on TC production whereby we quantify that a minimum rate of 1.25% is required to curb the RE. However, effective implementation requires targeted regulatory interventions that also account for socio‐economic trade‐offs, particularly in low‐income countries. Achieving genuine sustainability will require degrowth‐informed policies that explicitly target reductions in production and consumption to suppress the systemic drivers of rebound effects in the TC sector.