Possible to use smaller drive as bootable clone if amount of data within limit?

That all sound fine. It should continue to work until your data comes close to the capacity of the backup drive. Then differences in how files are split up will cause it to overflow a little before you expected.

When re-purposing a Hard Drive, I like to erase it with security options -- Zero all data, one pass. This makes certain every block can hold a known pattern. If a few blocks can not hold that pattern, the drive will use its spares to provide substitute blocks, up to a point.

If it runs out of spares, or has to substitute too many, you get "Initialization Failed". Better to know now than when you are trying to make a crucial backup.

Bad sectors automatically get re-written when new data are supplied. If the new data don't "stick" a spare will be substituted.

If you are happy with your clone, just update it. There is no need to write Zeroes to it. I was suggesting that process for when you make major changes -- it takes several hours to complete.

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You may prefer to use you smaller drive, Zeroed, to start a new clone, wait a little while to assure success, then start a Time Machine backup set on the larger Iomega.

Or some other approach that has not occurred to me.

I don't see why not, just remmeber to set CCC to keep it a pure clone, as it's default is to save saved states and that would overload it.

Drives are cheap, a 2TB powered external drive would run about $100 and you really need more than one backup anyway.