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The tax benefits are just Peter stealing from Paul.

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No they aren't. They are internalizing an externality.

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No they're not, Ed. Externalities are costs borne by somebody (i.e., society) other than the person responsible for creating the cost (i.e., gas guzzler drivers).

To "internalize an externality" means the gas guzzler pays the cost of the externality, i.e., a gas guzzler tax.

In the case of hybrids, society is bearing the cost (i.e., by spending from the public fisc) to pay for the actions of the gas guzzler driver (who is a free-rider).

Net net, subsidy of hybrid purchases has less to do with making sure that cost-creators bear the external costs for their actions, and more to do with creating incentives through public spending to influence private behavior.

The easiest way of forcing drivers to externalize their costs is to tax gasoline heavily. Subsidies through tax credits for hybrid vehicle purchases deals more with trying to drive volume for technology development.