This paper considers two neighboring countries wishing to make a joint effort to control pollution emission. We use a differential game model that includes emissions and investments in abatement technology as control variables. First, a coordinated solution that maximizes joint welfare is derived. Then we show that this outcome can be achieved as an incentive equilibrium in which each country uses an emission strategy that is linear in the other country's emission level. Further, we study the bargaining problem of allocating the joint welfare between the two countries, where the status quo is given by an open-loop Nash equilibrium. Finally, we design a mechanism for allocating over time the individual's total welfare such that each player instantaneous welfare under cooperation is higher than his noncooperative welfare at any instant of time.