'It' and 'this' difference

They are both grammatical. However, the only sentence of the two that is not capable of a complete misinterpretation is the one that uses this.

The government has planted one million trees in the city. This will improve the air quality in the environment.

The use of this can actually refer to two different things:

1. The planting of one million trees in the city.
2. The government planting one million trees in the city.

So, there is a small degree of ambiguity, but the essential meaning remains the same.

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In contrast, the use of it can be far more ambiguous:

The government has planted one million trees in the city. It will improve the air quality in the environment.

1. The planting of one million trees in the city.
2. The government planting one million trees in the city.

The first two interpretations mirror that of this. However, there's a third interpretation that changes everything:

3. The government.

In short, the following is a possible interpretation:

The government has planted one million trees in the city. [The government] will improve the air quality in the environment.

It would be read in the same way as:

The government has planted one million trees in the city. It will plant a further two million trees in the countryside.

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So, while there is a subtle difference in interpretation as to the referent of this, there can be a much greater difference in interpretation if it is used. (This can't be mistaken as referring to the government in the same way that it can.)

If you want to avoid a possibly significant misinterpretation, then this is the better pronoun.

I think Version B sounds better than Version A, but Version A could be reworded to:

The government has planted one million trees in the city. They will improve the air quality in the environment.

Here, the plural pronoun they refers to trees (as opposed to the singular pronoun it, which presumably refers to the act itself).

I think the sentence reads a little awkwardly when a singular pronoun follows the phrase "one million trees."