Air pollution, resulting from buffing dust waste produced by local leather tanning industry, has become a critical issue for the environment and public health. To promote a circular economy through resource recovery, this work developed a thermal insulation composite using buffing dust-laden tanning waste mixed with polystyrene and a blowing agent. To prepare the samples from leather tanning waste, different proportions of buffing dust (5–20% (w/w)) were blended with polystyrene in the presence of 3% (w/w) blowing agent. The composite material was processed in double-barreled with co-twin extruder to expose it to pressure and then heated at 200 °C. Different physico-chemical properties of composite samples were determined. The prepared composite materials had a good thermal conductivity (0.033–0.029 W/m-K), strong compression (5.21–6.25 ton), density (38–20 kg/m3), and water absorption (5–7.5%), as compared to conventional constructional insulation panels. The thermal conductivity of polystyrene was reduced to 10% after the addition of buffing dust (20% w/w). The presence of a blowing agent in the composite material enhanced its volume without compromising its physico-chemical properties. Thermo-gravimetric analysis showed that the thermal stability of the composite material ranged from 200–412 °C. FTIR analysis indicated that the composite had carbonyl and amino functional groups. The SEM images revealed the formation of voids with a decreasing homogeneity of the composite after the addition of the buffing dust waste. The EDX analysis revealed that the composite also had 62% of C and a tiny amount of Cr. This implies that the composite panels can be used for installation in buildings as thermal insulators in the construction sector. Overall, this work not only resolved the energy consumption problems during manufacturing, but it also brought positive impacts on the environment by recycling hazardous buffing dust and then reusing it as a thermal insulation material. Not only does this reduce the air pollution that results from the buffing dust waste, but this also promotes resource recovery in the framework of a circular economy.