Digital transformation and environmental sustainability: evidence from composite emission and circular economy indicators

As the European Union pursues climate neutrality by 2050 under the European Green Deal, understanding whether digital transformation accelerates or hinders environmental sustainability has become a critical policy question. This study investigates the heterogeneous effects of digitalization on environmental sustainability across 27 European Union countries from 2014 to 2024. Composite indices for digitalization, circular economy performance, and greenhouse gas emissions are constructed using three alternative weighting methods: entropy, equal weighting, and principal component analysis. The relationship between digitalization and environmental sustainability is analyzed through panel data techniques, including pooled OLS, fixed effects, and system GMM. The findings indicate that digitalization exhibits a strong positive influence on circular economy performance, with more pronounced effects in the post-COVID period, particularly in less developed economies. Conversely, the impact on greenhouse gas emission reductions is economically insignificant, even under dynamic specifications. Nonlinear patterns reveal increasing returns to scale, contradicting the Environmental Kuznets Curve hypothesis. These results suggest that the environmental benefits of digitalization are conditional on supporting institutional and economic capacities. While digital technologies facilitate circular economy transitions through enhanced information transparency and resource optimization, structural decarbonization requires more than mere technology adoption. Policy efforts should prioritize the development of digital infrastructure in lagging regions and integrate the EU’s twin transitions with digital environmental governance frameworks.