(FORTUNE Magazine) – Jim Rogers is a 54-year-old Kentuckian with a friendly grin, a slow drawl, and a quirky way of introducing himself. It goes something like this: Hi, I'm Jim Rogers. I'm the CEO of Cinergy, an electric and gas supplier. I burn 30 million tons of coal a year, and I'm responsible for 1% of the world's man-made carbon dioxide. Now what was it you wanted to talk about?

Rogers has always been a maverick. He's been reaching out to green groups for more than a decade. Since 1998 he has used his position at the Edison Electric Institute, a power-company trade association, to argue that his fellow CEOs should begin talking about the once taboo subject of CO2. And--in a move that burns up many within his industry--he favors compromise with environmentalists on legislation that would require power companies to spend billions of dollars to sharply reduce emissions of greenhouse gases and pollutants.

Congress is debating more-stringent air-quality standards for coal-burning power plants. Besides restrictions on sulfur dioxide, nitrous oxide, and mercury, lawmakers are also considering--for the first time--limits on the emission of CO2, a possibility that has split the energy sector into warring factions. Companies like Cinergy and American Electric Power, which are willing to compromise on CO2 reductions, are facing off against coal companies and electricity generators like Atlanta's Southern Co. that fear that any limits will mean the beginning of the end for coal-fired power in America. No matter which side wins, the outcome will have far-reaching implications for U.S. energy policy, the environment, and the economy.

Most people think of coal as the fuel that fired the Industrial Revolution. Remarkably, however, it is still responsible for more than half of all electricity consumed in the U.S. It is cheap--$20 to $30 per megawatt of electricity produced, vs. $45 to $60 for natural gas--and plentiful. Last year 1.1 billion tons of coal were mined in the U.S., up 16% from a decade ago, and there are still at least 250 years' worth of reserves. That's a statistic the coal industry has been quick to point to since Sept. 11, amid renewed concerns about America's dependence on foreign oil. But coal is dirty. Burning it produces a toxic miasma that contributes to smog and acid rain. And no fuel emits more greenhouse gas. Each year America's coal-fired power plants pump about two billion tons of carbon dioxide into the atmosphere, more than twice the amount produced by cars.

Rogers considers himself an environmentalist. But he says hard business logic, not green sentiment, underlies his position on CO2. His primary goal is to scrap what he calls a "death by 1,000 cuts" approach to regulation. Power plants are governed by 17 federal environmental programs, each with its own set of requirements and deadlines. Such conditions make long-term business planning nearly impossible. "No one wants to spend $1 billion to build a new coal-fired plant and discover ten years later that they have to spend another $500 million to meet new regulations," says Cinergy spokesman Steve Brash.

In return for regulatory certainty, Rogers would be willing to make steep reductions in CO2. "If there is a way to put together a comprehensive approach that gives us certainty over the next ten to 15 years, then I am prepared to offer further emissions cuts," he says. "Because that allows me to plan whether I retrofit my plants, whether I convert them to gas, or whether I shut them down." Rogers knows he'll never get the legislation he wants if it addresses only sulfur dioxide, nitrous oxide, and mercury. "Clearly the environmentalists are not going to have that happen," he says. That's why he is offering concessions on CO2; it's the ultimate bargaining chip in a high-stakes game of political poker.

Rogers learned his tactics from a master. Early in his career, he worked as a lawyer in the same Washington, D.C., firm as Robert Strauss, former Democratic Party chairman and U.S. ambassador to Russia. Rogers recalls that Strauss used to tell his young associates that "when a parade starts to form on an issue that affects you, you can do one of two things. You can throw your body in front of it and let 'em walk over you. Or you can jump in front of the parade and pretend it's yours." Rogers has made a career of jumping in front of parades.

In 1988, when he became CEO of PSI Energy, an Indiana utility that was a precursor to Cinergy, the company had just lost a bruising battle with local environmental groups that forced it to abandon a nuclear plant that was 56% completed. Scrapping the project resulted in a $2.7 billion write-off. Determined not to let that happen again, Rogers began working with local environmental organizations. In 1989, during the fight to revise the Clean Air Act, he made sure PSI became the first utility to endorse legislation that would steeply reduce sulfur-dioxide emissions--despite the fact that PSI was 99% dependent on coal. In exchange, PSI and the rest of the industry won greater flexibility on how to meet the new emissions targets.

In today's CO2 debate, Cinergy is again seeking flexibility. No cost-effective technology exists for removing CO2 from power-plant exhaust; there is no such thing as a CO2 scrubber. The simplest method to reduce CO2 in the air is to plant trees. The resulting forests, called "carbon sinks," absorb the gas. Cinergy has worked with the Nature Conservancy to preserve woodlands in Ohio and rain forests in Belize. But carbon sinks only do so much. "They're maybe 10% to 15% of an effective response," says Mike Coda, who directs the Nature Conservancy's climate-change program.

Coal-mining and electric companies have teamed up to work on "clean coal" technologies (environmentalists insist the term is an oxymoron), the most promising of which involves turning coal into a gas before burning it. But plants that run on coal gas cost more to build than conventional ones. And there is still the problem of what to do with the CO2 once it is removed from the coal gas. Experiments on carbon sequestration, which involve storing CO2 underground or trapping it deep in the sea, have only begun. That's why Rogers would like more time--and government subsidies--for further research.

He may not get either. The energy industry has cried wolf over deadlines for emissions cuts so many times that environmentalists are understandably skeptical. "It doesn't surprise me to hear the industry say this is too much too soon," says Rebecca Stanfield, staff attorney at the U.S. Public Interest Research Group. "They have said that at every turn since the 1990 Clean Air Act. But study after study shows these are achievable and cost-effective targets."

If green groups object that Rogers' proposals don't go far enough fast enough, his opponents worry that he's about to give away the store. "Regulatory certainty in these agreements is an illusion," says Dwight Evans, Southern's head of external affairs. "There's no guarantee that the next day environmental groups won't be back to pressure you for even more." Southern and Peabody Energy, the world's largest coal-mining company, are digging in to keep CO2 out of any emissions bill. To sway lawmakers, they paint doomsday scenarios about a U.S. economy hobbled by high electricity prices. They don't concede an inch, refusing even to acknowledge that CO2 poses an environmental risk. "There is conflicting research," says Irl Englehardt, CEO of coal giant Peabody Energy and Rogers' bete noire. "We need a new scientific review."

What really unnerves coal executives is that CO2 regulation might be the beginning of a permanent shift away from coal as a source of electricity generation. That would be a hard blow for an industry that just one year ago thought the combination of rolling blackouts in California, soaring natural gas prices, and the election of George W. Bush meant a glowing future. Coal stocks were some of the best performers during the first half of 2001--doubling and tripling while the shares of new-economy companies plummeted. Coal stocks have retreated since then, but coal prices have continued to increase steadily, meaning better profits for an industry that barely scraped by during the early 1990s.

Certainly business is booming at Arch Coal's Black Thunder mine in Wyoming's remote Powder River Basin. Arch, in St. Louis, is second only to Peabody in total U.S. coal production. Last year it mined 110 million tons, 65 million from Black Thunder. On a grassy range populated by elk, antelope, and mule deer, miners soften the earth with explosives before ripping it apart with draglines--colossal machines capable of removing 280 tons of dirt in a single scoop. The exposed coal seams are worked over by electric steam shovels. Trucks the size of houses speed 300-ton loads at 40 miles per hour from the shovels to coal crushers, which break the coal into two-inch chunks before conveying it to waiting rail cars. Computers keep tabs on the whole process, directing the trucks to maximize the mine's efficiency. On a good day Black Thunder will load 18 trains, each 2 1/2 miles long, most bound for Midwestern electric plants.

One-third of all U.S. coal comes from mines in the Powder River Basin, an amount that will increase to almost 50% by 2010. Powder River coal produces less sulfur dioxide than Appalachian coal. Coal seams in the Powder River Basin are also much wider than back East, up to 70 feet, vs. just five feet. That makes the coal easier and cheaper to mine. Plus, land-reclamation efforts are far simpler in Wyoming than in the East, where mountains are torn apart to dig coal. On the downside, Powder River coal burns with less heat than Eastern coal, which means electric companies need more of it to produce the same energy. And it emits just as much CO2.

Unless carbon sequestration technology improves dramatically in the next decade, limits on CO2 emissions will force power companies to begin switching to less-polluting natural gas or to renewable energy sources. That's why hard-liners in the energy sector can't understand Rogers' position. Privately they claim that he has sold out to the environmentalists in order to burnish his public image. But what's really happening is that the interests of electricity producers and coal companies are diverging. The Department of Energy predicts that coal will generate about 30% of America's electricity in 20 years, even if Congress mandates CO2 cuts. While that's bad news for coal, it isn't necessarily bad for Rogers. After all, he's in the electricity business, not the coal-burning business. "At the end of the day we have to produce energy and fuel our economy on a sustainable basis," Rogers says. "In the long term that means weaning ourselves from fossil fuels." It's not clear whether Rogers will be able to persuade Congress to adopt his proposals. The Bush Administration is against CO2 limits, and both the environmentalists on Rogers' left and Big Coal on his right are powerful and skilled political warriors. But Rogers thinks he hears a parade forming--and as usual, he's right out in front.

FEEDBACK: jkahn@fortunemail.com