Since it opened in 2013, the White Bay facility has been plagued by hundreds of complaints from residents, who argue emissions, vibrations and noise from ships moored at the terminal are making them sick.

Cruise liners must keep their engines running while berthed at the White Bay Cruise Terminal because it lacks an on-shore power source. But Balmain residents, who live within metres of the White Bay terminal, say the consequent air pollution is damaging their health.

The operation of the terminal was one of several case studies considered by a NSW parliamentary inquiry into the performance of the Environmental Protection Authority. The report, release on Friday, recommended changes to how the terminal operates, to mitigate the environmental impact of the facility.

The parliamentary committee's investigations included a visit the White Bay and it "can testify to the noxious fumes present in the streets adjacent to the terminal and the impacts quickly felt by those present," the report said.

"The committee acknowledges the significant impact these fumes and the corresponding issues with noise and vibrations have had on the quality of life of the surrounding community," it said.

The report also said the EPA "could have taken more proactive and persuasive action" during the approval process for the terminal, which was signed off by the former state Labor government.

The inquiry noted that a "considerable number" of groups had objected to relocating the terminal from Barangaroo, where the prevailing wind distributed emissions across the harbour, "ensuring minimal impact for surrounding residential areas".

"The committee considers that the decision of the previous government not to have a cruise terminal at Barangaroo to be a serious error... and notes that the original plans for Barangaroo included just such a facility," it said.

"A cruise terminal at Barangaroo would have allowed tourists much easier travel to key tourist areas in and around the Sydney central business district."

Although the environmental agency was restricted in its capacity to regulate shipping, the terminal's problems "should have been avoided or mitigated at the planning stage by adopting the EPA's original recommended conditions of approval, including low sulphur fuel and ship to shore power," the report said.

The inquiry has recommended the terminal be retrofitted with an on-shore power source for ships, and for cruise ship operators to develop noise mitigation strategies.

In addition, it recommended legislative change to require cruise ship terminals to hold an environmental protection licence to "facilitate a clearer regulatory role for the EPA", which should also request a review of national air pollution limits.

Balmain resident Katrina Horrobin, who appeared before the inquiry in October, welcomed ship-to-shore power as offering "some protection from the dangerous and highly toxic emissions which are making us and our kids sick".

But Ms Horrobin expressed disappointment the inquiry had made no specific recommendation for low sulphur fuel.

"The US, Canada, Britain, northern Europe, and the Caribbean have all regulated in recent years to limit sulphur content in the fuel these ships use to 0.1 per cent, while our government allows up to 3.5 per cent," she said.

Leichhardt mayor Rochelle Porteous said the report validated the complaints council and residents had been making "for a long time" about pollution issues at the terminal.

"It actually is an urgent issue and it has not been and continues not to be addressed by government and the EPA," she said.

Cr Porteous' call for action was echoed by Labor's candidate for Balmain, Verity Firth, and the Member for Balmain, Greens MP Jamie Parker.

Mr Parker said the terminal was "a symbol of the failure of both the Labor and Liberal parties when it comes to planning and development on our harbour".

Environment Minister Rob Stokes said the government was considering the report.

A Carnival Australia spokesman, who agreed moving the terminal away from Barangaroo was a serious error, said it had been committed to making the new facility work effectively once the decision was made.

"We have also been proactive in relation initiatives to improve air quality and to minimise noise," he said.

But the spokesman said shore-to-ship power would be "a prohibitively high-cost solution for ship owners, government and taxpayers".

A move to low sulphur fuel used would be constrained by "the ability to source a sufficient and affordable local supply," he said.