Whatever it is, it seems confined to the Ald Skar, as no other chimney in Morrowind is behaving unusually that I can locate. I can recall having a weird green smoke issue when I used SWG's Skies in the past, but in that case it was ubiquitous, and apparently was due to settings applied to the INI by the utility packaged with the mod. I still use a modified version of SWG's Skies, but not the INI settings, and in this case I've only got this solitary chimney belching out green smoke.
Ironically, there is no fireplace or stove anywhere inside the Ald Skar Inn, so the plot thickens....
Black smoke = no Pope. White smoke = new Pope. Green smoke = Nerevarine?
http://imageshack.us/a/img21/2935/mgescreenshot001n.png