A blockhead's environment bar shows how the world around it affects the character. The environment bar affects a blockhead's happiness bar as well, changing the speed of a blockhead's actions, such as crafting and mining. It may also affect full recovery of energy when sleeping on the ground.
Weather can affect a blockhead's environment. Exposed to rain or snow, a blockhead can become cold or wet. At night, in an unlit cave, or in any other dark place, the environment bar will go down. When any of those things are happening a blockhead will either want shelter or more light.
A blockhead's environment bar will increase if the blockhead is given what it wants, such as light, shelter, or appropriate clothing, moving the blockhead away from the source of the problem such as moving away from magma, or by having the blockhead meditate.