The Governors of Arizona, California, New Mexico, Oregon and Washington have given themselves six months to agree a regional cap on emissions. A year later they will establish a multi-sector regional carbon trading scheme.
Other neighbouring states and countries including Canada and Mexico have been invited to join the agreement.
"With this agreement, states are once again taking the lead on combating global climate change while Washington, DC sits on its hands," said New Mexico Governor Bill Richardson.
"This sets the stage for a regional cap and trade programme, which will provide a powerful framework for developing a national cap and trade programme," said California Governor Arnold Schwarzenegger.