Here is how CAFE works...
http://en.wikipedia.org/wiki/CAFE
For the purposes of CAFE, a manufacturer's car output is divided into a domestic fleet (vehicles with more than 75% U.S., Canadian or—after the passage of NAFTA—Mexican content) and a foreign fleet (everything else). Each of these fleets must separately meet the requirements. The two-fleet requirement was developed by the United Automobile Workers (UAW) as a means to ensure job creation in the US. The UAW successfully lobbied Congress to write this provision into the enabling legislation. The UAW continues to advocate this position.[14] The two fleet rule for light trucks was removed in 1996.
Fuel economy calculation for alternative fuel vehicles multiplies the actual fuel used by a "Fuel Content" Factor of 0.15[15] as an incentive to develop alternative fuel vehicles.[16] Dual-fuel vehicles, such as E85 capable models, are taken as the average of this alternative fuel rating and its gasoline rate. Thus a 15 mpg dual-fuel E85 capable vehicle would be rated as 40 mpg for CAFE purposes, in spite of the fact that less than 1% of the fuel used in E85 capable vehicles is actually E85. [5]
Manufacturers are also allowed to earn CAFE "credits" in any year they exceed CAFE requirements, which they may use to offset deficiencies in other years. CAFE credits can be applied to the three years previous or three years subsequent to the year in which they are earned. The reason for this requirement is so that manufacturers are not penalized for occasionally (due to market conditions, for example) failing the targets, but only for persistent failure to meet them.
Fleet fuel economy is calculated using a harmonic mean, which results in slightly different values than simple averaging.[2]
Nother good note...
Calculations of MPG overestimated
The EPA laboratory measurements of MPG have consistently overestimated fuel economy. This results in a shortfall of about 15% in actual vs. measured CAFE goals. Starting with vehicles in model year 2008, the EPA is improving their estimates of MPG.[48] This change does not affect CAFE ratings, only Consumer Guide values will change to reflect more realistic fuel efficiencies. [49]
The NHTSA spends a third of one percent of its budget on CAFE or 0.0004% of US gasoline expenditures.[50] [51]