Well, it's not like butanol or E85 is going to be cheap per gallon. There should be plenty of market incentive to make more efficient vehicles.
Here is the weird thing. (I documented it somewhat it the article, but I've got more extensive evidence in the book.) Market incentives don't seem to work well for efficiency. If you have higher prices, cars get more efficient, but not that much more efficient. An example from the article regarding natural gas/electricity is that most attics in the U.S. are underinsulated - in the sense that you could increase insulation in most of them and get a four year payback (even given prices back in the 90's.) You certainly expect in a well-functioning market that most homeowners would do this. Even for renters - you would expect landlords to insulate then charge slightly higher rents because of the value of lowered heating/cooling consumption. (Where landlords provide heating/cooling and include it in rent, you can think of even more incentives for them to make the investment.)
I can think of a lot reasons this doesn't happen and I'll bet you can as well - but it is an example market incentives not working well in this area; people don't respond well to the incentives we already have. We would be a lot better off today if CAFE regulations had not been stalled under Reagan, and never recovered.