How Circular Economy Innovation Can Backfire on The Environment: Quantifying the Rebound Effect of The Textiles and Clothing Sector

Circular economy (CE) is championed as a sustainability solution, promoting reuse, recycling, and resource efficiency to reduce environmental harm. However, efficiency innovations can trigger a rebound effect (RE), where lower costs stimulate higher consumption and production, paradoxically negating sustainability gains. This study applies a multi-region, multi-sector Dynamic Computable General Equilibrium (DCGE) model to quantify the circular economy rebound effect in the textile and clothing (TC) sector, the second most polluting industry. Our findings reveal a 155% rebound backfire, showing that CE innovations in the TC sector may exacerbate rather than mitigate environmental pressures. This challenges the assumption that CE alone can drive sustainability and underscores the need for complementary policies. We explore one policy - a uniform Pigouvian tax on TC production, finding that a minimum rate of 1.25% is required to curb the RE. However, effective implementation requires targeted regulatory interventions that also account for socio-economic trade-offs, particularly in low-income countries. To achieve truly sustainable outcomes, we argue for exploring broader systemic shifts, including insights from Degrowth theory.