One in three pieces of litter in Australia is a drinks container, but industry has until now fiercely opposed the introduction of container deposits, claiming it would cost jobs.

Under the NSW scheme, schools and charities will be encouraged to raise funds by collecting containers for cash, likely to be set at a 10c rebate. Beverages companies will be allowed to increase drink prices by the amount of the deposit, and only need to pay the deposit on redeemed containers.

In last week's letter, obtained by The Sun Herald, Mr Baird informed the National Packaging Covenant Industry Association that "the NSW government favours the introduction of a state-based container deposit scheme".

He invited the industry to work with his government to "further refine the design principles of such a scheme".

Despite an industry scare campaign on costs, the Baird government has received independent advice that shows a container deposit scheme "will be cost effective and efficient".

Reverse vending machines will be located in public places and community recycling centres set up, to target glass, plastic and cans of the size that are predominantly consumed away from home.

The machines have a capacity of 3000 PET bottles or cans, automatically crush the containers, and don't allow non-recyclable rubbish to be deposited - reducing the risk of contamination that hampers many local council recycling efforts.

Mr Baird rejected the industry's alternative proposal, which included funding more recycling bins at beachfront parks, and said in the letter the beverage giants need to make a "far greater commitment" to reduce packaging waste litter and boost recycling.

The letter, sent to the industry association's chairman Grant Musgrove and Coca-Cola Amatil managing director Barry O'Connell, is jointly signed by Mr Baird and the Environment Minister Rob Stokes.

Mr Stokes met with Coca-Cola chairman David Gonski in the days before Christmas on the issue, in what was believed to be a breakthrough in negotiations.

The Sun Herald reported on December 20 that the Australian Beverages Council had threatened to run attack advertising against the Baird Government during the March election if cabinet voted in favour of a container deposit policy.

Coca-Cola, Schweppes and Lion Nathan had previously taken federal court action against the Northern Territory government in 2013, after the Territory government introduced 10 cent container deposits that resulted in an extra 35 million containers returned in the first 12 months.

On December 23, senior executives from Coca-Cola, and the packaging association chief executive Stan Moore, met with NSW Environment Protection Agency and staff from Mr Stokes' office.

They were told their alternative industry proposal had been rejected because it presented a "significant policy and funding risk" and was unlikely to achieve the NSW government's litter reduction goal.

"The proposal lacks clear governance arrangements, program specificity and the level of long-term funding required to achieve sustained behavioural change," Mr Baird said in the letter.

The Liberal and Nationals government set a target of reducing litter in NSW by 40 per cent by 2016, based on 2011-12 data.