It should be a factor of the game, but I think it should primarily affect citizen mood. After all, when was the last time any of us saw thousands of square miles of orange sludge, rendering vast tracts of land utterly worthless? Never, it doesn't happen.
On the other hand, citizens will complain if the air becomes foul or the water too dirty. If you leave it untreated, they might move away. It's a more logical way to impact a city's production, I think.
They should either use improvements to counter the ill-effects, or give you a money slider so you can allocate funds to alleviate the problem.
But "whack-a-mole"(I think that's funny) pollution is something that makes the latter ages much less fun, so I'm glad it's being changed.