The phrase followed by ';' should be a complete sentence by itself. In this way we can remove A, D, E, because the reference to 'it' is ambiguous. C is in passive tense. B seems correct.

What is the correct answer.??

wow andy this one's a toughy!:)

lets go by POE -:
A. a) that immediate government action to combat it is merited by the situation ....... you are right that we should have a new sentence after ';'. hence we see that 'it' doesnt really have a referrent in this sentence. also, ...'it is merited by the situation' doesnt fit well with 'is a matter of debate. ' after that.

B.if the situation merits immediate action by the government is a matter of debate ....come one we are not using 'if' here. if is a purely conditional clause. we dont have anything to say like 'if x happens, then y happens)

C.whether to combat the situation is merited by immediate government action ...we read the full sentence and it doesnt make sense right? because there is ......is a matter of debate.
in the end

E whether the government should immediately combat it is merited by the situation ....(is a matter of debate.) again complete sentence doesnt make sense..

D That pollution harms the environment is self-evident; that the situation merits immediate government action to combat it is a matter of debate
now if we read closely, this is infact a new complete sentence after ';' and its parralel too. the 'it' used in this part actually refers to 'situation' which is explicitly stated in the new part after the semicolon. also the author is trying to say that (it can be clearly seen )That pollution harms the environment......but(semicolon)......does the situation need immediate govt action??? (this is debatable)
parallelism -: That pollution harms and that the situation merits

hope this helps a bit!