VANCOUVER - The federal government today announced a funding program worth up to $1 billion for some pulp and paper producers who have been squeezed by government funding to their American competitors. But the money comes with green strings attached.

The program applies to mills that produce a chemical by-product called “black liquor” which is then used as a fuel by the mill. If legislation is passed this fall, these companies will be eligible for $0.16 for every litre of black liquor burned this year, provided they invest the money into environmental upgrades to the mills over the next three years.

Similar mills in the United States have been receiving federal government funding ever since realizing last year they were technically eligible for a tax program that was designed to subsidize biofuels for road vehicles.

By mixing small amounts of diesel fuel into the black liquor so it can be classified as a blended “alternative” fuel, the liquid qualified for a $0.50US per gallon tax rebate (approx. $0.15CDN per litre). The scheme has resulted in tens of millions of dollars being paid to US pulp producers each month, and the re-opening of some closed American mills.

The tax loophole has been criticized in the U.S. as a drain on public coffers, and in other countries as an unfair subsidy to a struggling industry.

Canadian Trade Minister Stockwell Day, in a teleconference this afternoon, refused to explicitly confirm that the Canadian program was in response to the American situation.

“What I'll say is, we always monitor those types of things, and I'll leave it to others to draw their own conclusions,” he said.

The official announcement of the Canadian program, by Natural Resources Minister Lisa Raitt, focused on the environmental aspects of the program. The title of the initiative is “The Pulp and Paper Green Transformation Program.”

Nonetheless, Day acknowledged the money “would help to level the playing field” for Canadian companies who are currently at a competitive disadvantage.

Day also said that the Canadian program was designed to end this December 31 because American officials have indicated that Congress will amend their tax laws to cut off funding for black liquor by that date. If the American tax scheme ends sooner, he expects the Canadian government “would look at reciprocating that.”

But opposition Parliamentarians questioned whether struggling Canadian pulp producers will be able to make the upgrades required to qualify for the money.

“If you're a pulp and paper company and you're losing millions of dollars each month, are you going to make an investment in a condenser, or a hog-fuel boiler, or some kind of environmental measure to make it easier to heat and light your plant?” asked NDP Forestry critic John Rafferty (Thunder Bay-Rainy River) in an interview with The Tyee.

There is also no funding for other types of mills who wish to upgrade their facilities (including pulp mills which use a mechanical process instead of chemical), and there is no funding for mills which have already shut down and are therefore not currently burning black liquor.

Day could only say that a “significant number” of mills were expected to take advantage of the program, based on departmental discussions with forestry associations.

Rafferty described the plan as an environmental solution to an economic problem. Although he supports funding for environmental upgrades, he wants the government to match the U.S. subsidy until that subsidy is removed.

“Because the money that the U.S. pulp and paper companies get is direct cash ... [they] will still be able to undercut Canadian companies by about 50 percent,” he argued.

The environmental focus of the program likely has as much to do with trade law as political spin. Day emphasized that government had thoroughly reviewed all trade impacts of the plan, saying they “don't want to go back to the days of excessive duties and countervails ... of constant and ongoing court cases” caused by the softwood lumber dispute.

Amelia Bellamy-Royds reports for The Tyee.