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Hey,
Things in Dreams will automatically fade into the distance, but you can control how far that distance is.
To do that, you'll need to place a Sun & Sky gadget into your level. You can find this in the Gadgets menu, in the "Cameras & Lighting" section.
Once you've stamped one of these down, tweak it by hovering it and pressing L1+Square. On page 2 of the tweaks, you'll see a slider called Fog Range. If you're finding the fog kicks in too soon, then ramp up that value.
Hope that helps :)
- Liam