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Eco-friendly help with what to do on bathroom walls

We are trying to do a DIY update our children's bathroom. It is a small bathroom (~5x8 maybe)that currently has a layer of wallpaper with two layers of paint over it (thanks to previous owners). The wallpaper is coming off in some sections, so it needs to be addressed. I tried taking the wallpaper down, but it is impossible without tearing up the drywall. I was thinking of two options:

1) Tile the walls. Seems like alot of work and with two small kids, might be too much to undertake.

2) Put beadboard up most of the wall and then paint stripes at the top to camouflage the wallpaper lines (similar to a recent issue of TOH). My concern with the beadboard is that it will have alot of cracks that will draw moisture behind the paneling (I realize we can caulk, but still seems like it might be a problem in a small bath). Also, I would like it to be eco-friendly and non-toxic, so MDF and vinyl paneling are not great options and the adhesives used are pretty strong.

Does anyone have any thoughts or suggestions on how to deal with wallpapered walls that won't come down?

Thanks so much!!

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