More than a dozen states sued to block the regulation, saying it would allow dangerous levels of the toxic metal into the environment. Mercury is known to contaminate seafood that can damage the developing brains of fetuses and young children.
The U.S. Court of Appeals for the District of Columbia Circuit negated a rule known as "cap-and-trade." That policy allows power plants that fail to meet emission targets to buy credits from plants that did, rather than having to install their own mercury emissions controls.
The rule was to encourage plants to install pollution controls by, in effect, being paid to do so by plants that did not. The rule was to go into effect in 2010.
"This three-judge panel has done the world a favor and helped save lives," said Connecticut Attorney General Richard Blumenthal, one of many attorneys general who joined a lawsuit originally brought by New Jersey.
The three-judge court unanimously struck down the cap-and-trade policy and the Environmental Protection Agency's plan to exempt coal- and oil-fired power plants from regulations requiring strict emissions control technology to block emissions.
Before instituting the new regulation, the court held, the government was required to show that emissions from any power plant would not harm the environment or "exceed a level which is adequate to protect public health with an ample margin of safety."
The EPA argued it was not required to follow that rule, a stance the court held was "not persuasive."
"This explanation deploys the logic of the Queen of Hearts, by substituting EPA's desires for the plain text of section 112(c)(9)," the court wrote, referring to the Clean Air Act statute which requires the EPA to follow specific rules for delisting emissions to be regulated.
The agency defended the cap-and-trade rule, saying it represented the nation's first attempt to control such emissions, and that it would have reduced mercury emissions by 70 percent.
"Keep in mind, the U.S. now has no national mercury emissions regulation for these plants," EPA spokesman Jonathan Shradar said.
Cap-and-trade programs have been implemented successfully for other emissions (such as carbon dioxide, a major greenhouse gas) as a way to reduce emissions overall. Companies that reduce pollution below certain targets can sell "credits" to other companies that cannot meet those targets, thereby reaching an industry-wide target overall.
However, because mercury is highly toxic, allowing emissions to continue at some source points rather than be cut jeopardizes populations in ways not comparable to other pollutants - and poses dangers for years after, since the biotoxin stays in the environment (and in the bodies of animals and people) for a long period of time.
Still, Shrader said the EPA would consider whether the cap-and-trade policy could be resurrected under a different regulation. "It's good for America and it's good for the environment. We want to be a global leader on this issue," he said.
New Jersey Environmental Protection Commissioner Lisa P. Jackson applauded the ruling as "a tremendous victory that will result in a healthier environment for New Jersey's residents - especially our children."
The states argued that the cap-and-trade system would endanger children near some power plants that pollute but use credits to do it legally.
"This means the EPA is going to have to go back and do a real job of regulating all the toxics coming out of these plants," said attorney James S. Pew, who argued the case on behalf of several environmental organizations that filed documents in the case.
Joining New Jersey in the lawsuit were: California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Mexico, New York, Pennsylvania, Rhode Island, Vermont and Wisconsin.
Mercury is a powerful toxin which poses a threat of neurological defects in newborns when absorbed by their mothers during pregnancy. Such exposure could result in learning disabilities (such as impacts on cognitive thinking, memory, attention and language) and reduction in fine motor and visual spatial skills, as well as speech impairments and muscle weakness.
As many as 600,000 babies are born annually at risk of serious harm, according to the EPA's own estimates, and about 8 percent of U.S. women of childbearing age have enough mercury in their blood to cause concern for a future pregnancy, according to scientists at EPA, the Food and Drug Administration, and the Centers for Disease Control.
"The federal court agrees with the American Medical Association that EPA's flawed mercury program for coal plants is hazardous to our health," said attorney Vickie Patton of Environmental Defense. "This decision is a victory for the health of all Americans, but especially for our children who can suffer permanent brain damage from toxic mercury pollution."
"Today's ruling should show power plant companies and the EPA once and for all that they may cheat and delay required clean-up obligations, but the law will catch up to them," said John Walke, attorney with the Natural Resources Defense Council.
Industry organizations criticized the ruling.
"The court's decision represents a major setback for federal efforts to establish clear mercury regulations for coal-fired power plants," said Dan Riedinger, a spokesman for Edison Electric Institute, an association of power companies. "Now EPA has to go back to the drawing board, pushing mercury regulations far off into the future."
Associated Press writers Matt Apuzzo, Cara Rubinsky in Hartford, Conn., and Rebecca Santana in Trenton, N.J., contributed to this report.