Last minute reversal by US delegates paves way for talks towards new climate accord.
He was flanked by Democrat and Republican members of congress who had ushered the legislation through.
The House of Representatives passed the energy bill on Tuesday after the senate cleared it last week.
Bush had vowed to veto the original legislation passed by the House because it included $21 billion in taxes.
The tax provisions were dropped to get the bill approved.
Bush noted that earlier this year he had proposed a plan to cut gasoline use by 20 per cent over the next 10 years. But the president has long opposed arbitrary numerical standards for vehicle fuel economy.
The legislation increases the federal standard automakers must meet – 15km per litre for passenger cars, sport utility vehicles and small trucks – an approximate 4.5 km/litre increase from the current rate.
It would require refineries to increase the use of ethanol from about 22.7 billion litres a year to 136.2 billion litres by 2022 and require that by then at least 79 billion litres are to come from feedstock other than corn.
“I firmly believe this country needs to have a comprehensive energy strategy”
George Bush, US president
Bush praised that provision which would spur the development of ethanol from cellulosic feedstock.
“We understand the hog growers are getting nervous. The price of corn is up,” he said.
Democrats have hailed the legislation as a turn to a new direction in US energy policy.
“I firmly believe this country needs to have a comprehensive energy strategy,” Bush said before signing the bill.
He referred to the need for more nuclear energy and domestic oil production – issues that the new energy bill ignores.
Instead, the bill focuses largely on conservation, calling for more energy efficiency in “light bulbs to light trucks”.
The bill also calls for improved energy efficiency of appliances such as refrigerators, freezers and dishwashers, and a 70 per cent increase in the efficiency of light bulbs, and energy efficiency improvements in federal building and construction of commercial buildings.
Democrats said the fuel economy requirements will save motorists $700 -$1,000 a year in fuel costs and reduce oil demand by 1.1 million barrels a day when the fuel-stingy vehicles are widely on the road.
The overall bill including more ethanol use and various efficiency requirements and incentives will cut US oil demand by 4 million barrels a day by 2030, more than twice the current daily imports from the volatile Gulf, Democrats said.