diff --git a/internal/devconfig/config.go b/internal/devconfig/config.go
index 5dbba7614c5..5661cab20cc 100644
--- a/internal/devconfig/config.go
+++ b/internal/devconfig/config.go
@@ -346,9 +346,11 @@ func (c *Config) NixPkgsCommitHash() string {
 func (c *Config) Env() map[string]string {
 	env := map[string]string{}
 	for _, i := range c.included {
-		maps.Copy(env, i.Env())
+		expandedEnvFromPlugin := OSExpandIfPossible(i.Env(), env)
+		maps.Copy(env, expandedEnvFromPlugin)
 	}
-	maps.Copy(env, c.Root.Env)
+	rootConfigEnv := OSExpandIfPossible(c.Root.Env, env)
+	maps.Copy(env, rootConfigEnv)
 	return env
 }
 
@@ -406,3 +408,19 @@ func createIncludableFromPluginConfig(pluginConfig *plugin.Config) *Config {
 	}
 	return includable
 }
+
+func OSExpandIfPossible(env, existingEnv map[string]string) map[string]string {
+	mapping := func(value string) string {
+		// If the value is not set in existingEnv, return the value wrapped in ${...}
+		if existingEnv == nil || existingEnv[value] == "" {
+			return fmt.Sprintf("${%s}", value)
+		}
+		return existingEnv[value]
+	}
+
+	res := map[string]string{}
+	for k, v := range env {
+		res[k] = os.Expand(v, mapping)
+	}
+	return res
+}
diff --git a/internal/devconfig/config_test.go b/internal/devconfig/config_test.go
index 521aa09f033..3a1aeb3df8c 100644
--- a/internal/devconfig/config_test.go
+++ b/internal/devconfig/config_test.go
@@ -327,3 +327,103 @@ func TestDefault(t *testing.T) {
 		t.Errorf("got different JSON after load/save/load:\ninput:\n%s\noutput:\n%s", inBytes, outBytes)
 	}
 }
+
+func TestOSExpandIfPossible(t *testing.T) {
+	tests := []struct {
+		name        string
+		env         map[string]string
+		existingEnv map[string]string
+		want        map[string]string
+	}{
+		{
+			name: "basic expansion",
+			env: map[string]string{
+				"FOO": "$BAR",
+				"BAZ": "${QUX}",
+			},
+			existingEnv: map[string]string{
+				"BAR": "bar_value",
+				"QUX": "qux_value",
+			},
+			want: map[string]string{
+				"FOO": "bar_value",
+				"BAZ": "qux_value",
+			},
+		},
+		{
+			name: "missing values remain as template",
+			env: map[string]string{
+				"FOO": "$BAR",
+				"BAZ": "${QUX}",
+			},
+			existingEnv: map[string]string{
+				"BAR": "bar_value",
+				// QUX is missing
+			},
+			want: map[string]string{
+				"FOO": "bar_value",
+				"BAZ": "${QUX}",
+			},
+		},
+		{
+			name: "nil existing env",
+			env: map[string]string{
+				"FOO": "$BAR",
+				"BAZ": "${QUX}",
+			},
+			existingEnv: nil,
+			want: map[string]string{
+				"FOO": "${BAR}",
+				"BAZ": "${QUX}",
+			},
+		},
+		{
+			name: "empty existing env",
+			env: map[string]string{
+				"FOO": "$BAR",
+			},
+			existingEnv: map[string]string{},
+			want: map[string]string{
+				"FOO": "${BAR}",
+			},
+		},
+		{
+			name: "mixed literal and variable",
+			env: map[string]string{
+				"FOO": "prefix_${BAR}_suffix",
+			},
+			existingEnv: map[string]string{
+				"BAR": "bar_value",
+			},
+			want: map[string]string{
+				"FOO": "prefix_bar_value_suffix",
+			},
+		},
+		{
+			name: "path special case",
+			env: map[string]string{
+				"FOO": "/my/config:$FOO",
+			},
+			existingEnv: map[string]string{
+				"FOO": "/my/plugin:$FOO",
+			},
+			want: map[string]string{
+				"FOO": "/my/config:/my/plugin:$FOO",
+			},
+		},
+	}
+
+	for _, tt := range tests {
+		t.Run(tt.name, func(t *testing.T) {
+			got := OSExpandIfPossible(tt.env, tt.existingEnv)
+			if len(got) != len(tt.want) {
+				t.Errorf("OSExpandIfPossible() got %v entries, want %v entries", len(got), len(tt.want))
+			}
+			for k, v := range tt.want {
+				if got[k] != v {
+					t.Errorf("OSExpandIfPossible() for key %q = %q, want %q", k, got[k], v)
+				}
+			}
+		})
+	}
+}