Hampshire County Council proposed the plan when the government invited bids for schemes to ease school-run congestion.
But the Department of Transport has knocked back all 23 proposals from councils across the country, saying not one was innovative enough.
Councillor Mel Kendal, who is responsible for transport at the council, said: 'It seems they've rejected the plan simply because we haven't developed a new kind of rocket to go to the moon.
'This is a devastating response that reduces your confidence in the system.'
The council wanted a fleet of 15 yellow buses to take children to school in five areas across the county – including Havant and East Hampshire, which were earmarked for three buses each.
The buses would serve primary and secondary schools for £1 return.
Hampshire would have been given £200,000 to plan the scheme and then £6m over four years to run it.
As well as promoting cycling and walking, the council planned to give students travel information packs, and develop a real-time tracking system to monitor the buses as they go.
Although the plans failed to impress the government, councillors still believe Hampshire could learn from America.
Deputy leader Michael Woodhall said: 'There are 50m students in America. Twenty six million go to school on the school bus, while 24m get there some other way.
'Statistics show there were 20 fatalities in school bus transport in the whole of the US last year, whereas for children travelling by other means there were 800 fatalities.'
He added: 'A school bus in the US can cost only £40,000 whereas in the UK it would cost closer to £100,000. The challenge is getting that cost down.'
The Department of Transport suggested charging all passengers to make the scheme financially viable.
But the council voted to keep transport free for 8,000 children across the county.