1) You can, since the 555 has an open-collector output.
2) As long as the pulse width is wide enough (~5 usec for single-ended inputs driven by open-collector NPN) pulse width is completely irrelevant.
3) One step will produce a 1-bit change in the encoder output. Since you're using a 20-bit encoder, one step will produce an angle change of 360 / (2 ^ 20), or about .00034 degrees.
The maximum temperature the silicon experiences can be much more than ambient. 50 °C ambient certainly happens. That's only 122 °F. I've personally experienced that in the Kofa Wildlife refuge north of Yuma Arizona. You need to design to worst case, not wishful case. So let's say ambient can be 60 °C (140 °F).
That by itself isn't much of a problem, but you don't get that by itself. Take the same thermometer that reads 60 °C in open air and put it in a metal box sitting on the ground in the sun. It's going to get much hotter.
I've seen someone fry a egg on the hood of a car in the sun in Phoenix AZ. Granted, this was a stunt deliberately set up for this purpose. The car was parked at the right angle, the piece of hood was tilted at the right angle, and painted flat black. However, it still shows that just a piece of metal sitting in the sun can get really hot.
I once left a car parked at the Las Vegas airport for a few days. I had left one of those cheap "stick" ballpoint pens on the dashboard, partly sticking out over the side. When I got back the pen was bent at 90° over the lip of the dashboard. I don't know what temperature such pens melt at, but clearly it gets a lot hotter than ambient under common enough conditions in a enclosed box.
If you left some cheap piece of consumer electronics on the dashboard in the sun and it didn't work, you'd probably be a little irritated, then toss it and replace it. If the controller for your oil pump stopped working in the summer because it got too hot, you'd lose a lot of money, be pretty upset, and probably buy the replacement from a different company that takes quality more seriously. If your missile defense system stopped working because you deployed it in the desert of Iraq instead of some nice comfy test range in Massachusetts where it was developed, you'd be dead. The procurement officers that don't get fired will be extra careful to require all electronics to work at high temperature, and insist it get tested under those conditions.
Best Answer
In a 4-20mA current loop (which appears to be what you are talking about), the minimum 4mA current is set not for any measurement reasons per se, but to provide a guaranteed operating current for the electronics at the far end of the loop. This allows them to operate with no additional power supply at the far end, saving the extra wiring that would be needed. Often the transmitter will be a pressure sensor, or optical gate, or thermometer.
The 4mA is a compromise between low power consumption for the system, and enough power for the sensor to operate. There is no more magic behind the exact figure of 4mA than (say) 240v for mains voltage. It is a reasonable value, which over the course of time has been found useful, so has been supported by many different players, and become a standard.