Kiama Council has investigated a spill into the Barney St culvert next to Surf Beach.
The green substance is a drainage dye (Fluroscein) widely used to identify leaks in drains and other infrastructure.
The dye was being used by builders at a nearby construction site to test the integrity of their landscape drainage.
The dye is expected to dissipate during the day.
While the substance is not toxic, Council recommends avoiding contact until the waterway has cleared.