Senate Democrats stripped the bill of $21.8 billion in tax hikes, mostly on the oil industry, after they were unable to gather enough votes earlier in the day to defeat a Republican filibuster.
The revised measure passed easily, 86-8, and President Bush said he will sign it if it reaches his desk after going back to the House for approval next week.
The bill requires car companies to achieve an average 35 mile per gallon fuel economy for cars, small trucks and SUVs by 2020 -- the first time the fuel economy standard has been raised since 1975.
It also mandates the use of 36 billion gallons of ethanol fuel per year by 2022, including at least 21 billion gallons from feedstock other than corn, such as wood chips and switchgrass.
The bill "will begin to reverse our addiction to oil. It's a step in the right direction," Majority Leader Harry Reid, D-Nev., told the Associated Press.
However, Senate Democrats backed down in the face of a Republican filibuster and stripped the bill of $21.8 billion in tax hikes on oil companies and others, money that would have funded renewable energy investment, such as tax incentives for solar energy use.
"It's very disappointing," Marlene Brown, president of the New Mexico Solar Energy Association, told the Albuquerque Tribune. "The federal government needs to acknowledge that renewable energy is part of the solution and fund it."
Earlier in the week, Senate Democrats also agreed to drop a requirement that utilities produce 15 percent of their power from renewable sources such as wind and solar power.
"Could this bill have been better? Of course it could have," Reid told the Washington Post. But, he said, it was still a "good bill."
Many environmental advocates were pleased with the bill, according to the New York Times. Environmental consultant Dan Becker told the paper that it was the biggest environmental victory since the 1990 passage of the Clean Air Act.
But others said it didn't go far enough. Elizabeth Martin-Perera, a climate policy specialist at the National Resources Defense Council, told the Washington Post "Congress should be congratulated for taking the first step in the sprint to solve global warming." But added, "We're disappointed that there were some things left on the cutting-room floor."
The American Petroleum Institute, meanwhile, which represents the oil and gas industry, issued a statement saying, "We applaud the Senate for recognizing the adverse effect that increased taxes would have had on future energy supplies," but called the biofuels requirements in the bill unrealistic.