Decoding Innovation in Circular Economy: Investigating Policy Pathways for the European Union

The transition from a linear to a circular economy has become a strategic priority for achieving sustainable development, resource efficiency, and economic resilience. However, empirical evidence on the determinants of circular economy innovation (CEI) remains limited, particularly regarding the heterogeneous effects of these determinants across countries with varying levels of innovation performance. This study investigates the impacts of circular economy research and development (R&D), tertiary educational attainment, environmental taxation, trade in recyclable materials, and financial market development on CEI across the 27 European Union member states over the period 2000–2022. The analysis employs the Method of Moments Quantile Regression (MMQR) estimator to capture heterogeneous effects across the conditional distribution of CEI. The results reveal considerable variation in the effectiveness of policy and market drivers. Environmental taxation has the strongest positive effect in countries with relatively low CEI levels, whereas the impact of R&D and tertiary education increases in higher-performing countries. Financial market development significantly supports CEI only in lower innovation quantiles, while trade in recyclable materials promotes innovation across most quantiles. These findings demonstrate that a uniform policy approach is unlikely to maximize circular innovation across the European Union. Instead, policy interventions should be tailored to countries' innovation capacities, with lower-performing economies prioritizing financial and innovation infrastructure and leading economies strengthening advanced R&D ecosystems, industry–university collaboration, and high-value resource recovery.