An inquiry will be launched to examine the many question marks surrounding the proposal to raise the Warragamba Dam wall.
A NSW Upper House select committee will be established to investigate the proposal.
The committee will have a Labor-Independent representative majority, with One Nation already voicing their opposition to the dam proposal in the NSW Parliament on Tuesday.
The committee will examine development interests on the western Sydney floodplain as well as the environmental impact that a raised dam wall would have on the Greater Blue Mountains World Heritage Area.
The committee will also work alongside the United Nations Educational, Scientific and Cultural Organisation (UNESCO) to assess the adequacy of the Environmental Impact Assessment process to date.
Give A Dam campaigner Harry Burkitt said the inquiry was a massive win for the community.
"We welcome a formal parliamentary process that will examine the serious questions marks around developer interests in this dam proposal," he said.
"The inquiry will grill the NSW government on crucial aspects of the project.
"From developer land-grabs on the floodplain to the serious impacts on Blue Mountains World Heritage area - it will go through all the facts with a fine tooth comb.
"The NSW government have been extremely secretive to date about the dam proposal and its significant impacts on the iconic Blue Mountains World Heritage Area."
Wollondilly Council also welcomed the announcement.
Mayor Matthew Deeth said the inquiry was a positive step for the campaign against the dam wall proposal.
"Wollondilly Council has been vocal in its opposition to the proposed raising of the wall and is concerned about the impact it will have on our national parks, cultural sites and world heritage areas," he said.
"By raising the dam wall by 14 metres, the NSW government says it will reduce flood risk in the Hawkesbury-Nepean valley but one of the concerns many people have about this is that the wall raising will make it easier for developers to build more and more housing on flood-prone land in Western Sydney.
"Council has been awaiting the release of the environmental impact statement.
"The establishment of a select committee would make sure all the environmental impacts have been thoroughly considered."
A United Nations report also raised concerns about the proposed raising of the Warragamba Dam wall.
The report highlighted a number of issues and called on the NSW and Australian governments to send any environmental impact statements to the UNESCO before a decision was made about the future of the dam.