A better system, other than simple fuel taxes which would also do the trick, would be the sort of feebates Amory Lovins (who I'm not generally a fan of) has proposed. This way the manufacturers can directly see higher prices and actual profits on their more fuel efficient cars, while the government shuffles the money from gas guzzler purchases (imposed fees on purchase) to efficient car purchases (rebates). Otherwise manufactures simply have a continuing disincentive on fuel economy, simply because the CAFE standard exists.

This is what he could do -- now.  Lets hope other good ideas written above come about as well.

What manufacturers should do, given CAFE, is realize that it constrains them to pair up vehicles, in a sense. They can only sell a (profitable) Hummer if they also sell (at a loss) a Volt, because of how the average fuel economy works between the two. So given that constraint, the profit shouldn't all be allocated to the Hummer in manufacturing accounting, but should be evenly divided between the two cars, because you can't sell the Hummer without the efficient car to meet the average requirements.

Let's just hope Detroit gets managers and finance folk smart enough to figure this stuff out.

More efficient cars are an important part of addressing greenhouse gasses from the transportation sector.  However; unless we also address land use policies any technological improvements we make in our vehicles will be offset by the amount of miles that these vehicles will travel. Since World War II, we have become increasingly dependent on the automobile and, as a result, land is being consumed for development at a rate almost three times faster than population growth, causing carbon emissions to rise while reducing the amount of forested land available for carbon absorption. In order to address this issue, we must change our approach to land use and encourage smart growth principals incorporating higher density mixed-use development, an interconnected street network, and a variety of transportation options including mass transit, biking and walking. Where such development tools are used, people tend to drive 20% to 40% less.  Such local level policies employed in tandem with federal actions will prove to be effective.

1. Confusing the impact of higher mileage with lower gas prices.  Yes, both have the impact of putting more dollars in consumers pockets.  But lower gas prices result in more driving, while higher mileage cars don't necessarily.  When gas prices are higher - as they soon will be, due to both carbon pricing and peak oil - there will be a strong disincentive to drive more.  While the marginal cost (cost per extra mile driven) might be the same with higher mileage cars as with lower gas prices, the psychology won't be the same.  Motorists are not exactly rational economic actors; when gas prices are high, most of them will drive less, whether their cars are efficient or not.

2. Cash for clunkers.  How can anyone still seriously argue for this?  We have known for more than a decade that at least a third of the emissions of any car is embedded in its manufacture.  Cash for clunkers is great for automakers, but let's not kid ourselves that it's good for the environment.

Better yet, just bring in a honkin' big carbon tax since coal is a much bigger problem than oil.

Therefore, the tendency to drive more miles because your vehicle gets better mileage will be offset by the higher price per gallon, leading to about the same amount of miles driven, at the same total price spent.

Gas prices rise fairly quickly when they do rise, better mileage in vehicles is a slow process (unless they atually start letting us buy the ones that have been sold in other countries for years now). It all evens out after a while, and I'm thinking that's what they are thinking.