Advancing Environmental Sustainability Through Circular Economy: The Moderating Effects of Green Technology and Environmental Policy

ABSTRACT This study investigates the role of the circular economy (CE) in improving environmental sustainability in Europe, explicitly addressing the underexplored moderating effects of green technological innovation and environmental policy stringency on this relationship. While existing research has largely focused on direct effects of CE practices or isolated roles of technology and policy, their interactive mechanisms remain insufficiently examined, especially across heterogeneous European economies. Using a balanced panel of 27 European countries over the period 2000–2022 and applying the Pooled Mean Group Autoregressive Distributed Lag (PMG‐ARDL) model, the analysis captures both long‐run and short‐run dynamics while addressing cross‐sectional dependence and heterogeneity. The results reveal that CE practices significantly reduce CO 2 emissions and carbon intensity in the long run, confirming their role as a structural pathway to sustainability. However, the moderating influence of green technology is only partially validated: although its interaction with CE is negative, the environmental benefits emerge only after reaching critical thresholds of technological development and diffusion. By contrast, environmental policy exerts an immediate and robust moderating effect, consistently strengthening the positive impact of CE on environmental quality without requiring threshold conditions. Overall, the findings underline the need for a dual strategy: on the one hand, accelerating investments in green technologies to surpass the identified thresholds, and on the other hand, implementing stringent and well‐targeted environmental policies to ensure immediate and sustained ecological gains. Policymakers should, therefore, combine regulatory instruments with innovation support to reinforce the environmental effectiveness of CE practices across Europe.