The federal government is set to announce a $1-billion package on Wednesday to help Canada's struggling pulp and paper industry by countering a U.S. subsidy for using alternative energy, sources say.

The aid will be in the form of grants that can be accessed over a three-year period by Canadian pulp and paper mills that make capital improvements to reduce their dependence on traditional energy sources.

A government official says the announcement will be made by Natural Resources Minister Lisa Raitt and Denis Lebel, the minister of state for economic development in Quebec, at 12:30 p.m. Wednesday.

The aid is in response to industry requests for Ottawa to counter the so-called "black liquor" subsidy to pulp mills in the United States, which has been estimated at between $6 billion and $8 billion.

Industry officials say the Canadian package will not contravene the softwood lumber agreement or the North American Free Trade Agreement.

"We will only welcome announcements that respect the terms of the softwood lumber agreement," said Avrim Lazar, president of the Forest Products Association of Canada.

Lazar conceded that being on the right side of the law might not be enough to stop America's powerful and litigious lumber lobby from contesting the aid as a subsidy.

But Lazar said he was confident the Obama administration would not oppose a measure that promotes the use of alternative energy sources by Canada's 71 pulp and paper mills.

"They may come after us, and they'll lose, but I'm pretty confident they are not going to come after us," Lazar said.

Aid will save 'tens of thousands of jobs': Forest Products Association

The U.S. black liquor subsidy has been a sore point with Canadian pulp mills, not only because it gives their American counterparts a leg up in the highly competitive industry but because they argue it does little to improve the environment.

Last month, Canada, Chile, Brazil and the European Commission threatened to take the United States to the world trade body over the subsidy.

American pulp mills mix a pulp byproduct with diesel fuel and get a tax credit for using an alternative fuel.

Lazar said Canada's mills are already among the cleanest of any industry sector in the country, with 60 per cent of operations run on alternative fuels such as black liquor and other converted waste materials.

The goal of the grants would be to have the mills produce as much alternative energy as they consume.

Without confirming the announcement, Lazar said if the industry gets what it has asked for, tens of thousands of jobs would be saved.

"The pulp mills employs 76,000 people, and there are another 150,000 indirectly employed by the industry," he said. "This will save tens of thousands of jobs."