Developing sustainable plastics requires innovative strategies that reduce carbon footprints while enhancing the circularity of widely used materials. In this study, we modified renewable lignin macromolecules with benzoate ethyl functional groups and fractionated into more uniform lignin building blocks in a greener way. Incorporating them into semi-crystalline poly(ethylene terephthalate) (PET) at a 10% weight ratio leads to remarkable improvements in PET’s mechanical properties, with toughness increased by 97% and strength by 56%, while also achieving a 17% reduction in greenhouse gas emissions. These lignin-based additives outperform conventional toughening agents, offering both environmental and functional benefits. Our comprehensive analysis reveals that the benzoate ethyl lignin derivatives exhibit enhanced thermal stability and a controllable physical structure. The structural similarity between the benzoate ethyl groups and PET’s fundamental units facilitates the formation of micro-scale particles within the PET matrix, enhancing crystallinity and mechanical performance. Additionally, the composite maintains its properties after at least three reprocessing cycles, marking a significant advancement in the mechanical recycling of thermoplastics. This work highlights a promising pathway for utilizing lignin biopolymers and waste PET to develop high-performance materials with reduced environmental impact, contributing to the future of sustainable plastic production.