The impact of energy use on environmental quality is as large as for any other human activity. Individuals and firms use energy doing almost everything. Combustion of fossil fuels generates a variety of atmospheric compounds which contribute to air pollution, acid rain and climate change. Fossil fuel use, transportation and storage also contribute to contamination of soil, groundwater, rivers, lakes and the ocean, as with the infamous Exxon Valdez oil spill in Prince William Sound, Alaska. Moreover, efforts to increase use of domestic sources of energy have led mining and drilling in environmentally sensitive areas where these activities may conflict with species, ecosystems and recreation activities. The sharp increase in fossil fuel use in places like China and India has generated additional adverse environmental impacts and raised concerns about the transboundary and global dimensions of these effects.

Alternative forms of energy also have effects on environmental quality. Concerns about the long-term disposal of nuclear waste as well as the risks of nuclear power leaks or accidents have been a major obstacle for the expansion of nuclear power in recent years. Hydroelectric dams inundate valleys, block rivers, disrupt fish migration and other aspects of river ecosystems, and alter recreational opportunities. Biomass energy requires the cultivation of large acreages of crops, potentially creating additional adverse effects on soil, groundwater and surface water systems. Wind generators can kill birds and disturb habitats of other species, as well as degrading aesthetic amenities. Geothermal power emits low levels of carbon and sulfur dioxides and may cause increased geological activity, but has relatively little environmental impact (see World Bank). Solar power would require large areas of land to produce a significant share of the nation's energy, and may have high transmission costs due to the remote location of power facilities. Furthermore, generation of photovoltaic cells currently requires large amounts of energy relative to the energy they produce. Finally, wave energy generation may affect shipping lanes, fish habitat and aesthetics of coastal areas.