The U.S. government will be counting on a set of tightly structured rules to keep new subsidies for biomass fuel from driving up prices for wood products and paper.

Loggers, saw mills and other timber processors are eligible for government payments on tree bark, branches, wood shavings and other types of wood waste used by power plants or celulosic ethanol converters.

The Biomass Crop Assistance Program, which began last month with an initial appropriation of $517 million, is aimed at providing incentives for channeling previously unmarketable wood and farm crop wastes, such as corn cobs, into energy production. The program provides a dollar-for-dollar match up to $45 on the market price for a ton of dried biomass material.

U.S. Agriculture Secretary Tom Vilsack said Wednesday the rules for the program, which will be released Monday, will shield manufacturers of wood products and paper companies from price spikes for raw materials, by limiting the subsidies to material that currently has no value for other uses.

The subsidies are supposed to help loggers and fledging power companies offset their expenses for equipment and plants.

"Advancing biomass and biofuel production holds potential to create new jobs," Vilsack said. "Facilities that produce renewable fuel from biomass have to be designed, built and operated."

But skepticism about the subsidy program is running high, particularly after paper companies last year scored some $6 billion in federal excise tax credits by classifying paper mill waste residue, known as black liquor, as an alternative biofuel. Moreover, the combination of federal usage mandates and federal tax credits for corn-based ethanol fuel were blamed for driving the price of corn to record levels in recent years, squeezing profits for livestock producers and food manufacturers.

Paper and wood products companies, many of which already burn wood waste to generate electricity for their mills, worry the fuel subsidies will raise market prices for the wood feedstocks used for paper pulp and the saw dust particles needed to make composite wood panels in furniture and cabinets.

"It's already thrown low-grade wood values up in the air," said William Perritt, executive editor of the Wood Biomass Market Report.

Some observers estimate pulp wood prices will rise 30% to 50% if paper mills are forced to compete with the power plant operators for supplies of pulp wood.

But others anticipate that saw mills and power plants will use the subsidies to push market prices lower for logs or biomass waste on the assumption that timber harvesters will be able to offset the lower prices with government subsidies.

"The concern comes with the potential for the subsidy to skew existing markets," said Scott Dane, executive director for the Associated Contract Loggers and Truckers of Minnesota. "We want to make sure the program takes this into consideration."

International Paper Co. (IP) said it's reserving comments on the program until more details are known. Nevertheless, higher prices for wood in the U.S. are likely as residential housing construction recovers and timber imports from Canada continue to fall because of insect infestation.

"We're going to have a tight fiber market over the next decade," said Anna Torma, a paper industry analyst in New York.