The regulation, known as the Clean Air Interstate Rule, required 28 mostly Eastern states - including Virginia - to reduce smog-forming and soot-producing emissions that can travel long distances in the wind. The Environmental Protection Agency predicted it would prevent about 17,000 premature deaths a year.
North Carolina and some electric power producers opposed aspects of the regulation and President Bush found himself with unusual allies.
"This is the rare case where environmental groups went to court alongside the Bush administration," said Frank O'Donnell, president of Clean Air Watch, a group that has criticized other Bush administration policies.
The U.S. Court of Appeals for the District of Columbia Circuit ruled Friday that the EPA overstepped its authority by instituting the rule. It said the Clean Air Act did not give the EPA the authority to change pollution standards the way it did. Citing "more than several fatal flaws," the court scrapped the entire regulation.
"The Bush administration's environmental agenda has been gravely disappointing and damaging in many ways," John Walke, clean air director for the Natural Resources Defense Council told CBS News. "This was one bright exception. Unfortunately, the court ruling yesterday meant that even this exception did not survive."
The EPA said the rule would dramatically reduce sulfur dioxide and nitrogen oxide emissions, saving up to $100 billion in health benefits. Besides the reduction in premature deaths, the EPA also said the rule would have prevented millions of lost work and school days and tens of thousands of nonfatal heart attacks.
The handful of companies that brought the suit said Friday's ruling caught them by surprise. A spokesman for Duke Energy told CBS News the company had not intended to overturn the Clean Air Interstate Rule, and that the court had thrown the baby out with the bathwater.
While North Carolina Attorney General Roy Cooper said he was glad the court agreed "we need tougher rules to clean up and protect the air we breathe," his spokeswoman, Noelle Talley, said the attorney general's office disagreed that the entire rule needed to be scrapped.
William M. Bumpers, an attorney representing Entergy Corp., said a few electric companies flatly opposed the regulation but most generally favored it because it included cap-and-trade provisions. Such provisions allow companies that exceed emissions caps to buy credits from companies that do not.
"The power-generating industry had already invested billions and billions of dollars in anticipation of the trading market," Bumpers said. "They're not happy with this development."
The EPA said it was reviewing the 60-page opinion and would issue a response later Friday. The Bush administration can appeal the decision but environmental groups called for Congress and the EPA to quickly begin working on a new law or replacement regulation.