This paper argues that the most important environmental challenge within the Asia-Pacific region is that of uninternalised externalities. While developed countries have put in place mechanisms of governance and regulatory structures that internalise most of their domestic environmental external effects the same cannot be said of domestic environmental external effects of developing countries and transnational environmental external effects, although these are some of the most pressing environmental problems facing the countries in the region. Whereas developing countries are paying a high price for uninternalised domestic externalities they and the developed countries have an important stake in finding internalisation solutions to transnational environmental externalities. The paper argues that absence of linkage among these issues and other outcomes of keen interest to developing countries (viz. trade negotiations and the possibility of side payments) has made progress in this area impossible. Hence there is a case for institutional innovation to facilitate Coasian deal-making among these countries through issue linkage.