This research aims to explore how digital dynamic capabilities (digital sensing, digital capturing, and digital transforming capability) enable digital transformation to enhance the environmental performance of SMEs in Oman, focusing on understanding the moderating role of cost in this relationship. Data was collected from 409 SMEs through a survey and analyzed by Structural Equation Modelling (SEM) using SmartPLS 4 software. The results show that digital sensing, digital capturing, and digital transforming capabilities are positively related to digital transformation, where digital capturing capability is the strongest dimension of digital capability. Further, the digital transformation of SMEs has a strong relationship with environmental performance. In addition, the transformation cost weakens the significant relationship between digital transformation and environmental performance. The findings of this study are of paramount significance for policy and decision-makers, SME executives, and researchers interested in digital transformation and environmental performance, particularly in developing countries such as Oman. Deviating from conventional wisdom, this study attempts to develop an inclusive understanding of digital transformation efforts that can serve as a benchmark for SMEs toward more successful and sustainable outcomes.