Interstate environmental harms, which occur when decisions or actions in one state produce negative environmental impacts in another state, have challenged environmental law and American federalism for over a century. While even the strongest advocates of state primacy in environmental policy concede that interstate environmental harms necessitate federal governance, federal adjudication and regulation have done little to address the problem. This is due, in part, to a failure to fully understand the causes of interstate environmental harms. This article provides a new framework for understanding interstate environmental harms as political externalities caused by a combination of inadequate information, public process bias, and traditional economic externalities. To address these causes, this article proposes a new state-based approach termed interstate environmental impact assessment. Interstate environmental impact assessment would provide a procedural mechanism for an affected state and its citizens to influence the source state and minimize or prevent interstate environmental harms. The process itself would address the causes of the political externality, and also produce information to improve federal adjudication and regulation when disputes arise over continuing harms.