E-mail needs two things done to it but they're difficult to wrap one's head around.
The first thing it needs is to get more simple. E-mail has a lot of quirks, crust, special cases, and other things. This applies to SMTP but also to addresses (TO, CC, etc). Just as one example did you know that technically almost any character is valid in an e-mail address? Did you also know that EXAMPLE@ and example@ are two totally different addresses (case is as equally differentiating as characters)?
I liken this to the XHTML effort (to make HTML more strict). We need to take e-mail as it is used today, and essentially call the "edge cases" illegal. This would be compatible with 90%+ of existing implementations but would make future e-mail implementations (both client and server) far more straight forward. As it stands today you cannot build an effective client or server e-mail system by just looking at the respective spec's since there are so much strangeness.
Secondly AFTER the above has been done AND adopted they need to develop a new standard to replace HTML as the display format for e-mail (XML based). This should include things like signatures, quoting, in-line pictures, tables, and a small subset of text styling. Essentially take HTML, remove 50%+ of the functionality and then ship it as a standard people can cheaply implement.
Why? People who like HTML emails are happy with it; people who prefer plain-text emails (like me) won't like your solution either, since it's XML.
I think we already have a decent format for lightly formatted email, and it's the plain-text conventions (in which Markdown was based). Or Markdown itself, if you want something closer to a standard.
Plain text should stay as is. HTML is the problematic format that needs addressing. When they first started using HTML for e-mails it was just the natural thing to do, but with the benefit of hindsight it was a mistake.
So I am suggesting we take a subset of HTML, add a very small set of e-mail specific features (signatures, quoting, etc) and then deploy. This format should be entirely display-able with a single XSL (as the easiest implementation).
I disagree: Libraries to render HTML already exist and will continue to be developed, since they are used in web browsers anyway. The development effort would be greater if we introduce another (new) format specifically for email. Every E-Mail Client that wants to do so already implements HTML display.
The problem with HTML mail in my opinion is simply that it is overused. Often it is unnecessary bloat, and plain text works just fine.