If the Matrix meets your needs better, go with that. Since you're doing most of your commute by bike, I imagine that what miles you do put on your car will be to transport dogs+gear for trips or items needed for your home which might not fit as well in the Prius.

About emissions, it looks like the new standards only apply to 2009 models and beyond. Oregon DEQ info on emissions guidelines:
http://www.oregon.gov/ODOT/DMV/vehic...ssions.shtml08
http://www.deq.state.or.us/aq/vip/whatstested.htm