"So because he was worried about you and your well being that erased all the things he did? All the people he killed? Your brother among them. Treating me, your best friend, like his own personal chew toy?" Not to mention all the compulsion. Caroline didn't even know if their 'relationship' was consensual.
But it wasn't dream!Elena's actions that upset Caroline. It was the way Elena was talking about them. It was almost as if some of those dream feelings carried over. Yeah, maybe Damon wasn't quite as evil in this world, but he was still the asshole that cheated on her best friends. "I know you can't control your dream actions. But don't let one," she paused letting out a sigh before continuing, "intense kiss erase all the horrible things he's done. In either world."