The Canadian government unveiled a $1-billion aid program for the struggling forestry industry yesterday - a package narrowly crafted to rescue the sector from damage caused by U.S. subsidies without sparking a trade war.

The design will be tested in the days ahead as the hard-line U.S. timber lobby seeks ways to challenge it and force a trade dispute between Canada and the United States.

Ottawa's temporary lifeline is designed to partly offset the devastating impact of $6-billion to $8-billion (U.S.) in "black liquor" subsidies to pulp producers in the United States.

Mills in the United States have exploited a tax loophole to great effect since late 2008 that has enriched pulp producers, allowing them to slash prices - a move that puts their Canadian rivals at a severe disadvantage.

The money for the beleaguered pulp and paper sector, centred in provinces such as British Columbia and Quebec, comes weeks after Ottawa approved $10.6-billion (Canadian) in aid for the Ontario-based auto industry.

Yesterday's forestry aid is precisely targeted and could end early if the U.S. black liquor subsidy is cut this year.

Natural Resources Minister Lisa Raitt said the $1-billion will be available only for Canadian mills that produce black liquor, a remnant from the chemical processing of wood pulp that's later burned to generate steam energy.

U.S. mills have been mixing black liquor with diesel to exploit a tax credit intended to promote alternate fuels - although there are efforts in Washington to end this.

Ms. Raitt said the U.S. subsidy gives pulp producers a big incentive to make new investments that will, "coming out of a recession, place them in a very much more competitive position." She said Ottawa wants to ensure Canada isn't left behind.

It's estimated that only 27 of 71 Canadian mills produce black liquor and would be eligible to claim the aid. Those that use a thermomechanical process instead of chemicals to make pulp are not eligible.

However, Avrim Lazar, president of the Forest Products Association of Canada, said that Ottawa's aid will still benefit most companies because many have at least one plant that produces black liquor.

"It gives us a chance to be on a level playing field," he said.

Ottawa is offering a 16 cent per litre subsidy for black liquor produced between Jan. 1 and Dec. 31 this year only. Firms have nearly three years to claim the money and must use it for capital upgrades to become more energy-efficient.

Dave Coles, president of the Communications, Energy and Paperworkers Union, said the aid won't stop job losses and mill closings. He said Ottawa should have instead directly matched the U.S. black liquor subsidy and offered loan guarantees to companies.

Premier Gordon Campbell said he is "encouraged" by the new program because it levels the competitive landscape with U.S. producers without violating the Canada-U.S. softwood truce, and will also spur moves toward greater energy and environmental efficiency.

The 2006 Canada-U.S. softwood truce allows state aid to forest firms for "forest or environmental management, protection [and] conservation" if it does not affect timber prices. The betting in Ottawa is that it would be a stretch for the .U.S. to argue that environmental spending at a pulp mill significantly affects timber prices.

Yesterday, the litigious U.S. timber lobby, the Coalition for Fair Lumber Imports, suggested the aid could be an unfair subsidy but offered no proof and held off threatening to take a complaint to Washington.

"To the extent that the subsidy goes to corporate groups that produce softwood lumber, this likely constitutes a violation of the U.S.-Canada Softwood Lumber Agreement," coalition chair Steve Swanson said in a press release.

Canadian Trade Minister Stockwell Day said Ottawa is confident it's not offside.

"I would suggest anyone on the U.S. side who thinks this is not compliant with [the softwood agreement] needs to look in the mirror," he said.