The Circularity Advantage: Unlocking the Decarbonization Power of Environmental Taxation

ABSTRACT Achieving sustainable industrial development requires a greater understanding of how circular economy capabilities interact with environmental policy instruments. This study examines whether circular material use directly reduces manufacturing emission intensity and whether it strengthens the decarbonization effects of environmental taxation and renewable energy deployment. Drawing on the natural resource‐based view and Porter's hypothesis, the analysis uses a balanced panel of 27 European Union Member States covering 2013–2023. Panel threshold estimation is combined with Driscoll–Kraay fixed effects, dynamic panel estimation, and method‐of‐moments quantile regression to address cross‐sectional dependence, endogeneity, and heterogeneous effects. The continuous‐threshold test does not confirm a statistically significant nonlinear relationship between circular material use and manufacturing emission intensity. Nevertheless, an estimated circular material use rate of 11.20% represents an economically meaningful regime divider. Above this level, manufacturing emission intensity is approximately 3.3% lower, while the emission‐reducing effect of environmental taxation is around 33% stronger than in the low‐circularity regime. Renewable energy reduces manufacturing emissions in both regimes, indicating that its contribution operates independently of circular material use. The findings reposition circularity from a standalone decarbonization instrument to an enabling capability that improves the effectiveness of complementary fiscal policies. The study contributes to sustainable development research by demonstrating that progress toward SDGs 9, 12, and 13 depends on coordinated policy mixes rather than isolated improvements in material circularity. EU Member States with weak circular capabilities should prioritize recycling, reverse logistics, and secondary‐material infrastructure before intensifying environmental taxation. At the same time, renewable energy deployment can proceed simultaneously across all circularity regimes.