The CAFE rules (Corporate Average Fuel Economy) are a farce. I like to post on this subject, so this isn't the first and won't be the last.
CAFE attempts to control fuel consumption by regulating the fleet average fuel economy of a carmaker. CAFE says "all the cars you sell this year have to average out to X". Notice that it does not regulate the fuel economy of individual cars. And it does nothing to regulate consumer behavior--only car makers.
So what are the effects of CAFE? Automakers are forced to make small, cheap, fuel efficient cars whether anyone wants to buy them or not. These have to be cheap because that is the only way that they can be sold in volume. It is a cliche, and it is true, that the American automakers can not make a profit on small cars. To offset the incentives required to sell the small cars that Americans don't want, automakers increase profit margins on SUVs and other larger products. Basically, the large cars and light trucks are subsidizing the small ones.
Automakers can play some tricks to duck under CAFE. For example, the Chrysler PT Cruiser, which is based on the Dodge Neon platform, is classified as a "truck", and therefore lowers DaimlerChrysler's truck fuel economy number. Another trick is the Flex Fuel program, which gives automakers CAFE credits, whether people actually use ethanol or not.
The stated purpose of CAFE is to reduce gasoline consumption. There are much better ways to do this, which would be direct and effective. And honest.
First, gas taxes could be raised. Consumers will choose more fuel efficient vehicles out of economic necessity. To protect farmers (which may be America's most favored class of businessmen) and other commercial users, a business fuel tax deduction could be implemented.
Many people hate this solution, but because it will regulate consumer behavior. But at the same time, most people say they want CAFE to increase, and that the carmakers aren't doing enough to produce fuel efficient vehicles. Meanwhile, consumers demand more power, midsize sedans push 250HP, and even minivans now sprint 0-60mph in under 8s. Hybrids? Sure, but they have to perform as well as IC only cars, and we don't want to spend $4,000 extra for them.
Another way to increase fuel economy would be to write the rules to regulate it more directly, on a per-vehicle basis, rather than as a fleet average. For example, a rule could state that passenger cars with interior volume between 100 and 120 ft^3 and weighing between 3000lbs and 4000lbs must have an EPA average fuel economy of 29MPG, or a gas guzzler tax of $1000 would be levied. The rules could be subdivided for every vehicle class and weight range. The NHTSA recently moved in this direction, but not entirely.