Traditional owners and the Blue Mountains mayor have welcomed Unesco’s world heritage committee raising concern about a proposal to raise the wall of the Warragamba dam, saying it should be an embarrassment to the New South Wales government.

The committee has asked Australia to submit an environmental impact statement for the controversial project before any decision is made.

Kazan Brown, a Gundungurra woman and traditional custodian whose family were forced off their land when the dam was built in the 1940s, said it was an “awesome” decision that gave her hope the state government may not be able to raise the dam by at least 14 metres as planned.

“I hoped for it, I can’t say I expected it,” she told Guardian Australia. “This has been one step forward, two steps back. The NSW government has got a bit of history of doing what they want, regardless, so we will keep going to try to stop this thing going ahead.”

In its decision the Unesco committee noted concerns that raising the dam’s wall by 14 metres was expected to increase the frequency and extent of flooding of the world heritage-listed site.

The federal government responded on Thursday morning, saying it recognised the importance of protecting the heritage area and would submit the environmental impact statement to the committee for review.

“We will work closely with the world heritage committee and its advisory bodies, as we always do, to meet our obligations under the world heritage convention,” a spokesman for the environment minister, Sussan Ley, said in a statement.

Warragamba dam provides water to 4.5 million people. The proposal to raise the wall is expected to create an extra 995 gigalitre capacity to store flood waters and reduce the flood risk to houses on the Hawkesbury-Nepean floodplain, which includes the suburbs Richmond and Windsor, just east of the Blue Mountains.

But a leaked report said this would “permanently” change the Blue Mountains, which are world heritage-listed for their beauty, biodiversity and Indigenous sacred sites. It is home to more than 40 endangered plant and animal species. Unesco has said the move would “likely have an impact on the outstanding universal value” of the mountains.

The Blue Mountains mayor, Mark Greenhill, said the Unesco decision should be read as a warning the world heritage listing would be at risk if the dam expansion went ahead.

“What happened last night should be taken by the NSW government as an extreme embarrassment to them,” he said. “They’ve been called out on the international stage.

“The government want to flood part of the iconic Blue Mountains, which is just insane. What’s clear from the Unesco report is they are of the view the proposal will compromise world heritage values.”

Greenhill said there were better options, including using a spillway to control water levels. “To say there are no other options is just wrong,” he said.

The NSW minister for western Sydney, Stuart Ayres, said the environmental statement would be provided to the world heritage committee when it’s made public early next year.

He said raising the dam wall was a key part of a strategy to reduce risk to life and property on the Hawkesbury-Nepean floodplain. He said the final decision on whether to raise the wall would take place only after financial, environmental and cultural assessments.

“While there will be environmental impacts from temporarily holding flood water from behind a raised dam wall, they must be measured against the social and financial impact a catastrophic flood would have on Western Sydney communities,” he said.

A former NSW environment minister, Bob Debus, spoke about the concerns of several conservation groups at the world heritage committee’s annual meeting in Azerbaijan, which began on 30 June.

“The area proposed for inundation includes at least 300 known Gundungurra Aboriginal cultural sites, which would be damaged,” he said in his speech. “Its cultural and conservation value is exceptional even within the Blue Mountains area.”

Debus said Australia’s failure to protect the area would not be an “isolated misfortune” but would rather amount to “a fundamental attack” on the world heritage convention.

The committee has asked for the environmental impact statement report to be submitted by December next year for it to consider in 2021.

with agencies