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Urban manufacturing has emerged as a key concept in the discourse on sustainable urban development, yet its precise contributions to sustainability remain incompletely understood. This article presents a systematic literature review that examines the role of urban manufacturing in promoting low‐carbon, energy‐, resource‐, and space‐efficient urban economies. By analysing 163 relevant articles on urban manufacturing identified in the Web of Science and Scopus databases, this review synthesises key sustainability arguments and empirical evidence with a focus on environmental impacts. Findings are structured along three key dimensions of efficiency: carbon, resource, and space. These are subdivided into two underlying logics that emerged as central themes in the scientific literature: sustainability by proximity and sustainability through urban synergies, which are possible when urban manufacturing is functionally integrated into the city. While theoretical and anecdotal claims of environmental benefits abound, empirical validations across different contexts are lacking and require further research. In conclusion, the positive impact of urban manufacturing on the environment depends on integrating advanced technologies into specific spatial, environmental, and socio‐economic contexts. This does not mean that we lack confidence in the arguments regarding urban manufacturing’s positive environmental impact. Rather, it is a call for more empirical research. Future research should prioritise the analysis of technologies and their implementation in different urban environments to engage with this discrepancy between the large number of arguments and the limited and only partially transferable evidence.