Knowledge, innovation, and governance in the circular economy: Pathways to carbon reduction in the EU

This study examines how circular economy (CE) practices, innovation intensity, and research capacity influence carbon intensity across 23 European Union countries over the 2008–2022 period, with particular emphasis on the moderating role of institutional quality. Institutional quality is evaluated with an extensive set of governance indicators, rather than relying on a limited set of governance proxies, which allows a more nuanced analysis of how specific governance constructs are associated with sustainability outcomes. Based on the panel econometric approaches, the results indicate that CE practices and research capacity are consistently related to lower carbon intensity, but the impacts of CE on carbon intensity are not the same in each of the models. Innovation intensity also decreases carbon intensity, implying that technological efforts in the EU context are increasingly oriented toward environmental goals. Institutional quality is found to be an important driver of carbon outcomes, directly as well as through interaction effects, suggesting that governance conditions influence the effectiveness of other drivers of sustainability. In particular, the impact of CE practices and research capacity on the environment is positively strengthened by institutional quality, while its interaction with innovation exhibit more diverse relationship across estimators. By integrating Institutional Theory, the Knowledge-Based View, and Ecological Modernization Theory into a single empirical framework, this study advances the understanding of sustainability transitions as governance-mediated processes. The results highlight the importance of innovation and CE in the context of an effective institutional framework, as this can provide the highest carbon reduction benefits and present important lessons for policy design and institutional change in developed countries.