I just ran into this myself and found another alternative: you can set Passenger's RAILS_ENV in your .htaccess file (e.g. in /home/username/yourdomaindir/.htaccess):
After that, restart your passenger instance:
What I like about this is that you don't have change environment.rb. (I deploy from svn and don't like server-modified files). Though you also have to remember to set the right environment when you rake:
I'm a RoR newbie, though, so if there's a good reason not to do this please let me know.