Energy secretary Chris Huhne said that, "despite everyone working extremely hard, we've not been able to reach a satisfactory deal for a project at Longannet at this time".
Longannet was the only project remaining in a long-running government competition offering £1 billion to help fund a commercial-scale CCS demonstration project. The initiative would have pumped liquefied CO2 emissions from the coal-fired plant into depleted oil and gas fields in the North Sea.
Despite pulling the plug on the project, the government stressed its commitment to CCS as a key part of the UK's long-term energy strategy and insisted there would be "no backsliding" on the £1 billion available for projects.
But the delay to testing and rolling out the technology has worried environmentalists, who believe that power stations pledging to capture their carbon will be approved years before any effective technology may be available.
Last month, the Scottish government approved energy firm ScottishPower's 1,000MW gas turbine plant at Cockenzie in East Lothian on the basis that it would capture its own carbon in the future.
Keith Allott, head of climate change at environmental charity WWF, said that CCS was at risk of becoming a meaningless concept that could lock the country into a new generation of gas-fired power stations.
He said: "Planners and decision-makers looking at carbon capture-ready schemes need to be very cautious. CCS is not a dead option but we need early proof that it's viable. The government needs to press ahead with a demonstration project for a gas-fired power station."
Jeff Chapman, chief executive of trade body the Carbon Capture & Storage Association, agreed that any power stations approved from now on would have to be retrofitted with CCS because of the government's pledge to substantially decarbonise the power sector by 2030.
Despite the Longannet decision, Chapman said that four CCS projects could be running by 2018 if the government used a streamlined funding and construction process.
The Department of Energy and Climate Change is soon due to publish a CCS "roadmap", outlining investment plans for the technology.
Funding could also come from Europe, with six remaining UK CCS projects having applied to the European Investment Bank for financial support.