When it comes to climate change, as Texas goes, so goes the nation.

That's why it was a big deal when Irving-based ExxonMobil announced last fall that it was cutting off funding of groups casting doubt on climate change--and pledged to step up its support of federal policy discussions.

It was an even bigger deal when Texan George W. Bush acknowledged in his State of the Union address in January the "serious challenge" posed by global climate change.

The biggest deal of all--at least in money terms--came last month, when Kohlberg, Kravis Roberts and Texas Pacific Group announced their $45-billion takeover bid of Dallas-based TXU Corp. As part of this largest-ever private equity offer, TXU has agreed to scale back its coal plant expansion plans from 11 plants to three, in favor of more investments in wind and solar power and conservation to save on CO2 emissions.

Another big deal lies ahead today, when shareholders will vote on the proposed $4.1 billion merger of Dynegy and LS Power. If approved, Houston-based Dynegy would become one of the nation's largest power companies--and among the top five U.S. carbon-emitting utilities.

The proposed terms of the TXU buyout leave Dynegy and LS Power with the nation’s most ambitious coal-plant expansion plan.

Eight new coal plants proposed by LS Power would add nearly 7,000 megawatts of generating capacity and produce approximately 60 million tons of carbon dioxide emissions annually. That's equal to almost half of ExxonMobil's CO2 emissions from its far-flung global operations.

Assuming the merger goes through, and these power plants are built, the "new Dynegy" would nearly double its generating mix from coal to almost 40 percent. This may come as a jolt to "old Dynegy" shareholders who presently own a company with power coming mainly from cleaner-burning gas-fired power plants.

Given the volatility of natural gas prices, Dynegy's diversification into other energy sources may not be such a bad thing. But the question is whether diversification into more coal is the right move going forward.

When former Vice President Al Gore testified before Congress last week, he called for a moratorium on new coal plants that aren't designed to sequester carbon dioxide. LS Power's plants are based on older technology that can't do this efficiently.

Given that 50 percent of our nation's power comes from coal, Gore's proposal represents a radical departure from business as usual. Yet a new report from the Massachusetts Institute of Technology backs this conclusion. Even more companies are willing to take dramatic steps, acknowledging the "inconvenient truth" that business will have to pay for the right to produce greenhouse gases as we enter an era of carbon emission constraints.

Just last week, Kansas City Power & Light, in an agreement with the Sierra Club, pledged to offset all CO2 emissions from a new coal-fired power plant in Missouri by making additional investments in wind energy and conservation programs. This "carbon neutral" plan one-ups the deal that two other environmental groups, Environmental Defense and the Natural Resources Defense Council, helped.KKR worked out with TXU.

In January, on the eve of President Bush's State of the Union address, 10 major U.S. industrial companies announced their support for a federal mandatory program to cap and trade program CO2 emissions. These companies include industrial powerhouses General Electric, Caterpillar, Duke Energy and BP America. They want more certainty over their strategic planning decisions. TXU now is seeking to join this group.

Dynegy, in recent securities filings, acknowledges that greenhouse gas controls could have "far-reaching and significant impacts on the energy industry." But it hasn't yet stated how such controls might impact its merger with LS Power. It says only, it "cannot predict the potential impact of such laws or regulations on our future financial condition."

This may be a fair assessment of the current federal impasse on climate change regulations. But it isn't especially forward-looking. Given how minds are changing in Texas--and throughout the nation--on climate change, if shareholders can't get these answers before Dynegy's merger with LS Power, they likely will be asking for them shortly thereafter.

*The author's views do not necessarily reflect those of ISS or its clients.