The landmark ruling by the US Supreme Court represents a major setback to President Joe Biden's climate plans.
The case against the EPA was brought by West Virginia on behalf of 18 other mostly Republican-led states and some of the nation's largest coal companies.
They argued that the agency did not have the authority to limit emissions across whole states.
These 19 states were worried their power sectors would be forced to move away from using coal, at a severe economic cost.
In a 6-3 ruling, the court sided with the conservative states and fossil-fuel companies, agreeing that the EPA did not have the authority to impose such sweeping measures.
At the heart of Thursday's opinion was a question over the EPA's authority to regulate planet-warming emissions from power plants, which are a huge contributor to the climate crisis.
Around 25% of planet-warming greenhouse gas emissions around the globe and in the US come from generating electricity, according to the EPA. And coal, the dirtiest fossil fuel, powers about 20% of US electricity. Emissions from power production rose last year for the first time since 2014, an increase that was mainly driven by coal use.
The Supreme Court said the Clean Air Act does not give EPA broad authority to regulate planet-warming emissions from power plants. The agency still has options to regulate emissions, but the court said that the law does not empower the agency to put a limit on emissions and force power plants to move away from fossil fuels and toward renewable energy.
For decades, the Supreme Court has held that judges should generally defer to government agencies when interpreting federal law. On Thursday, the conservative majority continued a recent trend of chipping away at that practice.
Instead, the court's justices embraced what's called the "major questions doctrine" - which asserts that a federal agency's discretion is limited on big issues that involve broad regulatory actions. If Congress had intended the Environmental Protection Agency to be able to issue sweeping regulations of an entire sector of the US economy, they said, it would have explicitly written that power into the Clean Air Act.