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 go into effect in 2010.

The court struck down the cap-and-trade policy and the Environmental Protection Administration's plan to exempt coal- and oil-fired power plants from regulations requiring strict emissions control technology to block emissions.

New Jersey and many other states challenged the policy in federal court. The agency defended the rule, saying it represented the nation's first attempt to control such emissions and would reduce mercury emissions by 70 percent.

The three-judge panel agreed with the states that the EPA did not have the authority to exempt the power plants. The court unanimously ruled that EPA's arguments were "not persuasive."

Mercury is a powerful neurotoxin that accumulates in fish and poses the greatest risk of nerve and brain damage to pregnant women, women of childbearing age and young children. Emissions of mercury total about 48 tons a year, most of it in the form of air pollution that winds up in waterways.

The states argued that the cap-and-trade system would endanger children near some power plants that pollute but which also 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 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.