From Marginal Revolution:

Via Andrew Sullivan, Eric dePlace notes that "You save more fuel switching from a 15 to 18 mpg car than switching from a 50 to 100 mpg car." And so you do. A 15 MPG car would require 1,000 gallons of gas to drive 15,000 miles while an 18MPG car could get it done in just 833 gallons. That saves 167 gallons of gasoline. By contrast, since a 50 MPG only uses 300 gallons to go 15,000 miles, upgrading to 100 MPG can't save that much gas -- the super-efficient car uses 150 gallons.

It's called "diminishing returns." It's easy to see if you chart the number of gallons saved by improving a given gas mileage by 1 mpg, which I've done below (per 1,000 miles driven).

Improving gas mileage from 10 mpg to 11 mpg saves 9 gallons of gas per 1,000 miles (all else equal), while improving gas mileage from 50 mpg to 51 mpg saves just 0.4 gallons per 1,000 miles -- or just 4 gallons per year, if you drive 10,000 miles per year.

I think CAFE is a dumb piece of legislation for a bunch of reasons. One is its focus on "fleet averages." CAFE orders car makers to improve the average fleet gas mileage. A car maker can do that by improving the fuel efficiency of its clunky SUVs.* Or it can do that by improving the fuel efficiency of its already-efficient compacts. (It can do both, of course.) Increasing a 35 mpg vehicle's gas mileage by 10 mpg saves just 10% as much fuel as increasing a 15 mpg vehicle's gas mileage by 10 mpg. These are perfectly equivalent methods of compliance under CAFE, though, so a car maker will choose whichever option (or combination of improvements) will cost it the least.

If you think this kind of legislation is a good thing, there's a simple fix: mandate reduction in average "gallons per mile." That would give a 1 mpg increase in a low-gas-mileage vehicle a lot more weight than a 1 mpg increase in a hybrid's gas mileage. E.g., improving gas mileage from 15 mpg to 20 mpg is a 25% reduction in "gallons per mile," but improving gas mileage from 40 mpg to 45 mpg is just an 11% reduction in gallons per mile. The car maker would have an incentive to make the improvements where they would make the most difference.

*Under the new CAFE standards, car makers will have to lump their SUVs with their passenger cars in calculating fleet averages.