There's been some debate in Australia in the wake of prime minister Kevin Rudd's announcement of financial backing for Toyota to build a hybrid Camry in Australia on whether hybrids represent a big saving in carbon emissions or not. This is an old debate, starting with a claim that a Toyota Prius's lifetime energy cost was higher than a big SUV, when you took into account manufacturing and the environmental cost of the battery.
That's an old story and well trawled over so there is little point in going over that again.
The bigger picture story is should we be fussing over conversion to electric cars or hybrids, when electricity is mostly generated from carbon emitting fossil fuels? An electric car or hybrid can add some efficiencies like regenerative braking, so it should overall have better efficiency than directly burning fossil fuels in the engine -- even if as in the case of a purely electric car or plug-in hybrid, it gets some power from fossil-fueled mains electricity.
I argue that instead, we should be looking at how to get as many people as possible into public transport. Even without changing the mode of energy, there are huge savings to be had there. If we work on an average of 50 litres/100 km for a diesel bus and 10 litres/100 km for a car, and 30 times as many people in the bus, the bus uses one sixth of the fuel per passenger, a saving of nearly 85%. A hybrid or small car will do significantly better, but a bus will still win easily, provided it is reasonably full. A train may not do better because electricity in most countries is mostly generated from very dirty sources, with a relatively low efficiency. A diesel engine may have an efficiency of up to 45% (with the rest wasted as heat); a coal power plant may be as low as 30%. Add in transmission losses, and an electric train is getting quite low value for the emissions produced -- though still significantly better than a car carrying the typical 1.5 people.
Buses then are the obvious quick fix. But as with cars, they have the problem that every bus has to be changed once improved technology is available.
Longer-term, trains are a better strategy to pursue, because cleaning up power generation for them fixes every train.
So, should the Australian government be encouraging local manufacture of hybrids? I do not see any great harm in it. But it is really only a very small part of the solution. The big ones are encouraging more use of public transport, putting in more train lines and services and cleaning up power generation.