Rather than confining the animals to cages, the zoo's lions currently live in an environment that it specially designed to mimic their natural habitat.
the zoo's lions currently live in an environment that it specially designed to mimic their natural habitat.
the zoo designed a special environment for its lions in which the animals currently live in a mimic of their natural habitat.
the zoo is currently housing its lions in an environment that it specially designed to mimic their natural habitat.
the zoo's lions currently live in a special environment that the zoo designed to mimic their natural habitat.
the zoo currently houses their lions in a special environment designed to mimic their natural habitat.
The answer revision goes mainly through the fact that the zoo needs to be the subject of the underlined sentence, not the lions. That's pretty clear and I assume most students who get to this level of questions understand that. This thinking discards A, D and E (which has an obvious grammar mistake "zoo-their"). At this stage, it's quite hard for me to understand why the correct answer is C. I can see that B uses "in which" right after "lions" which awkwardly means that "animals live in lions", but C uses "it" which ambiguously could refer to environment right before it.
Anyways the answer revision gives this explanation but I can hardly find it enough to get a lesson out of it.
(B) This choice is incorrect because it uses the wordy and awkward phrases "in which the animals currently live" and "in a mimic of their".
(C) CORRECT. The modifier "rather than confining the animals to cages" correctly describes the subject "the zoo."