Circular Economy, Innovation, and Environmental Sustainability in the European Union: Insights From Panel VAR Analysis

ABSTRACT The transition toward climate neutrality in the European Union necessitates a deeper understanding of the dynamic relationships between circular economy practices, innovation, and environmental performance across diverse national contexts. This study addresses this need by applying a Panel Vector Autoregressive (Panel VAR) model to annual data for the 27 EU Member States over the period 2010–2022, capturing feedback effects among circular material use, resource productivity, greenhouse gas emissions, renewable energy deployment, GDP per capita, and R&D investment. The results suggest that higher resource productivity is associated with reduced emissions. At the same time, the use of circular materials and the deployment of renewable energy stimulate innovation through increased investment in research and development (R&D). Innovation emerges as a key mediating mechanism in the nexus between the circular economy and sustainability. At the same time, significant cross‐country heterogeneity highlights that the effectiveness of circular strategies depends on structural and institutional conditions, underscoring the limits of uniform policy approaches. Beyond policy implications, the findings are relevant for corporate social responsibility (CSR) and ESG frameworks, showing that circular economy indicators can function as measurable sustainability and ESG‐related performance metrics within circular supply chains. Overall, the study provides dynamic, evidence‐based insights to support adaptive public policies and CSR‐aligned strategies in line with the European Green Deal's objectives.