"My travel policy says we have to rent a compact and should turn down upgrades due to the potential for increased fuel costs"
Whoever wrote that policy needs to be moved to a new job, because they don't know what they're talking about. In modern cars, the important factor is how much money the manufacturer has invested in the power train. I've often rented larger cars that are more economical than small ones. If the larger car has a highly sophisticated engine with a nine speed gearbox and auto - coasting / auto - shutdown, it can be more economical than some little car with a low tech engine and only four gears. Especially when you consider the rental company will buy the cheapest model of the small car, which has likely got the low tech power train.
That's certainly true of European models, would expect same would be true in North American models.