Re Otter: I'm going to take this a piece at a time...it's loooong.
Background: I sense a moral here: heavy industry and development is bad. Though it's a little heavy handed, maybe even Anvilicious, I won't argue with the premise. But you also mention Pokemon training and battling as part of the problem. How is that responsible for the environmental degradation of Kanto and Johto? This is an important point to explain, because it leads up to the events in Terramont.
The collapse of Kanto’s battle system in Johto and Kanto leads to events spilling over into the 'pristine' region of Terramont, which, in turn, is infected by the chaos, experiencing a 'weakened infrastructure' and 'crumbling society'. Wait a min. If Terramont used to be a wilderness, it must have previously had no infrastructure or society. So how could both decay? Anyway, this leads to the villains finally appearing, a 'radical minority' entirely opposed to Pokemon battling and vowing to get rid of it...somehow. Frankly, these guys sound like a bunch of crazies. Terramont's main attraction is as a place to battle Pokemon, right? So banning Pokemon battling would pretty much destroy the economy, right?
In hindsight, it appears as though the background was written to justify the existence of people who want to get rid of Pokemon battling. I am not sure that it has done that.
Quick Notes:"The main question in the story that creates conflict will be the whole "Is Pokemon training/battling a sustainable and ethical activity, and should it be continued?". I always think of it as a realism-meets-Pokemon idea. After all, with all those roads and factories, and virtually everybody you meet being a Pokemon trainer, you gotta wonder sometimes how it all holds together. I suppose I'm also an environmentalist in that regard. ;p"
Again, the question of whether Pokemon battling is sustainable or not leaves me confused. Does Pokemon battling put a strain on natural resources? Does it produce toxic waste or CO2? Does it lead to deforestation, depletion of fish stocks, or climate change? I've always thought of it as a sport or hobby, like horseback riding or dog training - completely harmless and irrelevant to the environment.
The question of whether Pokemon battling is ethical or not...now, there's a question that needs no preamble. I would be very excited about a hack that explores that question in detail. But is that your goal? The background doesn't mention anything about ethical treatment of Pokemon. Your focus seems to be the environment (and maybe infastructure?).
I'm glad to hear you won't be following the '8 gyms and Elite Four' formula through to the end. When you say that "the system pretty much falls apart" near the end, I imagine that the gyms themselves will be crumbling and the gym leaders running for their lives. XD
Features to Consider:
1. Limit number of Pokemon owned to 6: I like that idea. I never train more than 6 Pokemon, anyway. But it's a very big change. It goes against the 'Gotta catch 'em all' philosophy.
Would you also be limiting the number of species that can be owned? If not, the player might have a hard time choosing just 6.
2. Player as a character: If you think it makes the game better, sure. But let the player name their character, all the same. When you say you'll keep the player's ability to make some decisions, do you mean the player will be making plot-related decisions? I don't think that happens in most Pokemon games. When you're asked 'Yes' or 'No', it never matters which you pick.
3. Limited transportation: Hooray! I totally agree. Fly has never made any sense - most flying Pokemon are no larger than their riders. They wouldn't be able to get off the ground. Maybe a wizard did it? It's good to hear that Surf will be a key item rather than a Pokemon skill, tying in with the limitation on how many Pokemon you can own.