I’m not sure how I feel about an ordinance that requires 2-acre lots. It may discourage McMansion development (although I have seen some pretty ridiculous McMansions on bit logs) but it also encourages sprawl. Of course, if it were up to me I’d probably have super strict regulations that forced people to build dense but green ecovillages and be labeled as a goddamn communist hippy neanderthal or something along those lines.

Graywater systems are illegal where I live, but hopefully that will change before too long. As it is, there’s a town ordinance that requires houses to be built on at least 2 acres, partly to discourage McMansion developers, but officially to allow for space for a well and septic system (there’s no city water), plus room to redig either if necessary.

All your wastewater (toilets, showers, sinks, washing machine) gets mixed together and sent into the septic tank. The septic tank is basically just a big concrete tank buried in the ground. Back in the old days, they were often constructed of bricks and therefore didn’t even hold water very effectively but nowadays they are pretty waterproof, like a swimming pool.
Septic tanks have an outflow system that is designed to hold in the “floaters” and the “sinkers.” So all the solid stuff settles to the bottom and all the greasy/fatty stuff floats to the top and only the liquid part moves out of the septic tank. Generally, there is a healthy microbial community in the septic tank that eats the solids and the greases and transforms them into liquid waste so the volume of solids and greases stays about the same over time (e.g. solids move in, are eaten by microbes, and are replaced by new solids). But the microbial community can get overwhelmed, especially if homeowners throw stuff like bleach down the drain.

So, the liquid part moves out of the septic tank and into what is called the septic field. The septic field is generally a series of parallel perforated pipes laid out in a gravel bed about a foot or two below ground level. The idea is that the water trickles out and is evenly distributed over a large area of soil so it can inflitrate into the soil (underground) and not oversaturate it. This movement through the soil will “clean” the wastewater by filtering out any tiny particles and allowing soil microbes to eat all the organic matter.

There are a couple of issues. One is that the soil type makes a big difference in how the water flows. If it’s a tight clay soil, the water doesn’t infiltrate very quickly and can end up pooling, even to ground level. If the soil is very sandy, the water will flow right through without time for any treatment to occur. Another is understanding what is happening with groundwater. If the groundwater table is high, the wastewater can mix with it before it gets much treatment and then you have contaminated groundwater. A third has to do with soil saturation. If the soil is too wet, there isn’t enough oxygen in the soil to allow aerobic bacteria to eat the organic matter. Ideally you have anaerobic bacteria (no oxygen) doing their thing in the septic tank and aerobic bacteria (lots of oxygen) doing their thing in the septic field but if both places are super wet, there’s no room for oxygen.

Basically, septic systems work pretty well in low density situations where the soil is a nice loam with a healthy microbial community and the groundwater table is a ways below the septic field and the area is free from flooding. Unfortunately, that probably only describes about a third of the septic systems in use today. Septic fields also tend to clog over time it’s not a permanent solution (I think I’ve heard 40-ish years but it’s one of those things that isn’t really tracked and you can’t really tel there’s a problem until you start smelling sewage in your yard).

So determining how “green” a septic system is depends a lot on the site characteristics. But if we assume a site is pretty good for a septic field, I would say this is my order of preference:
1. composting toilet with wetland system for graywater
2. wetland system combined with septic system for everything (and logistically speaking, it probably makes the most sense to have a “cluster system” that collects and treats waste from several houses rather than putting one in each yard)
3. septic system by itself (tied)
3. traditional municipal wastewater treatment system that does not receive storm water (tied)
4. properly designed outhouse (essentially a septic tank without an outlet; some microbial activity occurs but mostly the stuff just sits there)
5. traditional municipal wastewater treatment system that also treats storm water - these systems tend to have big overflow problems when it rains, sending untreated or partially treated wastewater into rivers

Did that help? Probably more than you wanted to know.