From the perspective of firms, an environmental mitigation strategy should meet societal demands for sustainability while also being economically viable and profitable. In this paper, we develop a financial model to help firms choose their mitigation strategies, using a real options approach. In doing so, we categorize a firm’s potential strategies into abatement (a growth option; investment in new abatement technology for now) and offset (a deferral option; deferring technological investment for now and waiting to purchase environmental credits in the future). Using this framework, we provide firms with financial guidance on which option to prioritize to maximize firm value. Finally, we apply the model to real-world cases, calculating and comparing the option values of each strategy to inform investment decisions.
