In general, environment.rb *is* the place where you should perform
configuration. There's even a comment at the bottom of the file to
that effect 
You need to consider what it is that you're actually configuring. If it's some string which acts as the application title, you could place this in a constant:
[ environment.rb, at the end ]
  ApplicationName = "I Caught You A Delicious Bass"
and then reference this constant somewhere else. In your example, because 'application_name' doesn't start with a capital letter, Ruby assumes that it is a local variable and it is almost certainly lost within the scope of your ApplicationController (the class defined in application.rb).
In a nutshell, use constants if you want to set some value that needs to persist in a different part of Rails. You could even define these within a module to keep the top-level namespace clear.