if the scenery is far distant you could use 2 demensional pictures (.bmp,.pcx,.tga ...) as sprites.

closer stuff could be low to mid-poly models, which use an lod system.

For the sky: I would recommend a sky cube which is in fact a large image consisting out of 6 parts the four directions (north,east,south,west) and bottom, top.
Don't ask me which order though.
You can find some free ones on the net and in the reference manual is an example for a skycube.
However you have to remember to have a hollowed cube around the whole level with a texture assigned to it.
This texture needs the "sky" flag to be set to "on"