The textile industry is under pressure to adopt sustainable production methods because its contribution to global warming is expected to rise by 50% by 2030. One solution is to increase the use of recycled raw material. The use of recycled raw material must be considered holistically, including its environmental and economic impacts. This study examined eight scenarios for sustainable denim fabric made from recycled polyethylene terephthalate (PET) fiber, conventional PET fiber, and cotton fiber. The evaluation based on the distance from average solution (EDAS) multicriteria decision‐making method was used to rank scenarios according to their environmental and economic impacts, which are assessed using life cycle assessment and life cycle costing. Allocation, a crucial part of evaluating the environmental impact of recycled products, was done using cut‐off and waste value. Life cycle assessments reveal that recycled PET fiber has lower freshwater ecotoxicity and fewer eutrophication and acidification impacts. Cotton outperformed PET fibers in human toxicity. Only the cut‐off method reduces potential global warming with recycled PET. These findings indicated that recycled raw‐material life cycle assessment requires allocation. Life cycle cost analysis revealed that conventional PET is less economically damaging than cotton and recycled PET. The scenarios were ranked by environmental and economic impacts using EDAS. This ranking demonstrated that sustainable denim fabric production must consider both economic and environmental impacts. Integr Environ Assess Manag 2024;00:1–19. © 2024 The Author(s). Integrated Environmental Assessment and Management published by Wiley Periodicals LLC on behalf of Society of Environmental Toxicology & Chemistry (SETAC).