Personally I'm not in favor of the whole notion of a candy canes and heart shaped trees style of good in this game. If you want to go the fairytale style route for good it would also make it necessary to make evil into its fairytale style form. So instead of the brutal murder that you get in the games current evil biomes, you would get a lot more of necromancers kidnapping dwarf maidens and putting them at the top of their towers, or having dwarves being captured by ogres to be cooked (though still leaving plenty of time for the heroes to rescue them). While a fairytale style with the Dwarf Fortress style sense of humor and twists would be a fun option for world generation way down the line, I don't think it should be a primary feature in the game, and it's certainly not the way it should be now with evil being far more of a straightforward brutal rape style than a scheming to kidnap smurfs one.
As for as the objectiveness of good and how it should be defined, we can argue about the subjectivity of what is good and what isn't until we're all blue in the fingers and have gotten nowhere, or just decide that we're talking about a video game (albeit a highly intricate one) and that proving objective or inherent good and evil isn't really necessary. We can either leave these concepts out of the game entirely, or decide that common notions of good and evil should exist in some tangible form and have reflections in the game world. I'm inclined to go with the latter since we can already dig to a hell full of demons or embark in good and evil biomes, and given how prominent the conflicts between the forces of good and evil are in most fantasy, I think they should be in the game.
Now the question is to figure out what interpretation of good and evil you want to use. Personally I think the broad interpretations of good and evil in Dungeons and Dragons would fit this game well. In basic summation, in D&D evil means accomplishing your goals at the expense of others, while good means accomplishing your goals in spite of others, and there are real entities that watch over these sorts of behaviors. The way I picture it, the good and evil biomes should be highly linked to the divinity of their respective nature, and you should be judged, rewarded, and punished based on your actions. For example, say that a nearby human town is under attack and many refugees flee to your hills/mountain. In a good area you would be expected to shelter, feed, and protect them, and for extra good points you send them back home after the attack is over well provisioned and with a lot of building materials, causing your good gods to smile down on you. An evil biome on the other hand would reward you for bringing the refugees in, pilfering any valuables they happen to be carrying, and either sacrificing them for blessings or making them into slaves, much to the chagrin of the evil deities. Or in another scenario, say you're being sieged for the first time. In the good area the game may recognize that you're probably not prepared for the incoming enemy, and you'll receive a message through your priest or spirit medium saying that the deity watching your fortress will smite your enemies if you increase happiness in your fortress, or prepare more dwarves for war to help defend allies or something of that nature. On the other hand in the evil area you would get a message from the evil deity looking at your situation and say "Hahaha, I see you're in a bit of a predicament, sacrifice Urist McLegendaryminer to me and I will bless your dwarves with the ability to crush their foes." If you accept and sacrifice Urist, then three of your dwarves are chosen at random and made into great axedwarves with demonic armor grafted to their skin. If you deny these requests too frequently then the deity will start to see you as a threat and an affront to his land, and will send forces out to purge you. That's when the deities of the opposite alignment can come in and offer their aid, and all of a sudden there's some blue in that purple zone or vice versa, assuming that your actions have brought you in favor with those deities of course. The area that your fortress is in shouldn't just determine the creatures that inhabit it, it should also heavily influence the behavior and nature of your dwarves. For example, dwarves in good areas should be more resistant to sadness and tantrums, but when it does happen it should be disastrous due to how interconnected everyone is, while in evil areas tantrums and murders would be more frequent but less disastrous for the fort at large because the environment necessitates them not caring as much about each other.
The divine deities should also be highly concerned with battling their opposites, expanding good or evil territory and so on. Deities arm their followers for these conflicts with advanced healing abilities, paladins or shadow knights, destructive spells, or any other number of things that you can imagine, and call on their fortresses and towns to send soldiers out for war. This would also necessitate being diplomatic with neutral civilizations, and either converting them to your way or purging them from the map. This would make for some interesting embark choices, since you could potentially send a small no-nonsense military force to colonize an area on the periphery of the enemy area for the greater good (or evil as it were), or start as a neutral settlement and then work your way into the favors of one deity or another after building your shrine and making the surrounding area good or evil (and fulfilling the obligations that come with it), or you could be a neutral civilization that wants no part in a planar war and seeks to purge divine influence from the world for the sake of mortals. Or of course you'd still be able to set divinity to zero in your world parameters and have the conflict between good and evil be no more than an abstract concept in your world.
I would love to see a system implemented like this, and I have a feeling that it's going to be similar to the sphere and divinity system that Toady puts in. There's far more interesting ways to implement good and evil beyond simple healing rain or evil fogs, though they should still be in the game. You can also implement lawful and chaotic alignments for these areas, for instance having a chaotic good area fully regrow all its forests randomly, or have a lawful evil biome that rains elf blood from Sandstone to Timber every year. There's a lot of possibilities here, which is why I like it far more than having good areas just being different colored and slightly twisted evil or have them automatically defaulted to forest areas full of unicorns and elves. The forces of good are far more diverse than that.
Edit: Also how do you delete posts? Didn't notice my little flub up before.