Modifier "that" - can it modify a phrase?

No 'that' here can not refer to interactions.
that pretty much functions like a which (for this kind of usage)

yes it is an absolute phrase.
use with-surface-temperatures-estimated-at-minus-230-degrees-143219.html
for more info.

why can't that refer to interactions if the verb affects is changed to affect.. as affect can't now refer to the singular atmosphere.

I see what you are saying here. Valid concern.

see if this helps.
https://www.manhattangmat.com/forums/usa ... 15311.html

please check the exceptions in the 'advanced modifiers section' .

I guess it can refer to interactions.. But it would be better if some expert confirms on this..

I stand corrected.
'That' does not function like 'which', in that it can be slightly away from the noun it modifies. And from that logic it can modify interactions here. (after interactions there is a "mission critical" modifier)

right. something new !

This could help
https://magoosh.com/gmat/2012/that-vs-which-on-the-gmat/

So...if we ignore the verb form here (i.e. whether it is 'affect' or 'affects'), then how to decide that 'that' refers to whether 'interactions' or 'atmosphere'??

Interesting discussion here. Let's step back and look at the big picture with regarding modifiers. You have Noun Modifiers and Adverbial Modifiers. As the name suggests, Noun Modifiers modify nouns. With few exceptions, Noun Modifiers must "touch" the noun they modify. Those few exceptions are "mission critical modifiers" as was mentioned in an earlier post. Here is an example of a mission critical modifier - "Picasso's works of art, which are displayed in museums around the globe, are all priceless". The modifier is "which are displayed..." but this modifier does not modify art - the noun the modifier is touching. The modifier skips over the mission critical modifier "of art" to modify "Picasso's works". For the most part, these mission critical modifiers are very short and they are the exception, not the rule, when it comes to Noun Modifiers.

You are asking how to decide whether that refers to "interactions" or "atmosphere". Both of these are nouns, so we are left with the Noun Modifier "touch rule", resulting in "that" incorrectly modifying "atmosphere". You could try to make an argument that "between the ocean and the atmosphere" is mission critical, but it's awfully long to be a mission critical modifier. Also, it doesn't have the same level of criticality as "works of art". That said, you can see that the writers of the GMAT understand that this could be a point of confusion, so they introduced a S/V agreement error to invalidate answer choice C.

In general, the "touch" rule for noun modifiers will be a great source of eliminations for you on modifier problems.

KW