diff --git a/terraform/context.go b/terraform/context.go
index 66e954245..e6b9b4b23 100644
--- a/terraform/context.go
+++ b/terraform/context.go
@@ -3,7 +3,9 @@ package terraform
 import (
 	"fmt"
 	"log"
+	"os"
 	"sort"
+	"strings"
 	"sync"
 
 	"github.com/hashicorp/go-multierror"
@@ -98,6 +100,26 @@ func NewContext(opts *ContextOpts) *Context {
 		par = 10
 	}
 
+	// Setup the variables. We first take the variables given to us.
+	// We then merge in the variables set in the environment.
+	variables := make(map[string]string)
+	for k, v := range opts.Variables {
+		variables[k] = v
+	}
+	for _, v := range os.Environ() {
+		if !strings.HasPrefix(v, VarEnvPrefix) {
+			continue
+		}
+
+		// Strip off the prefix and get the value after the first "="
+		idx := strings.Index(v, "=")
+		k := v[len(VarEnvPrefix):idx]
+		v = v[idx+1:]
+
+		// Override the command-line set variable
+		variables[k] = v
+	}
+
 	return &Context{
 		destroy:      opts.Destroy,
 		diff:         opts.Diff,
@@ -108,7 +130,7 @@ func NewContext(opts *ContextOpts) *Context {
 		state:        state,
 		targets:      opts.Targets,
 		uiInput:      opts.UIInput,
-		variables:    opts.Variables,
+		variables:    variables,
 
 		parallelSem:         NewSemaphore(par),
 		providerInputConfig: make(map[string]map[string]interface{}),
diff --git a/terraform/context_test.go b/terraform/context_test.go
index 31308e8d5..ed8184650 100644
--- a/terraform/context_test.go
+++ b/terraform/context_test.go
@@ -6417,6 +6417,10 @@ func TestContext2Apply_vars(t *testing.T) {
 }
 
 func TestContext2Apply_varsEnv(t *testing.T) {
+	// Set the env var
+	old := tempEnv(t, "TF_VAR_ami", "baz")
+	defer os.Setenv("TF_VAR_ami", old)
+
 	m := testModule(t, "apply-vars-env")
 	p := testProvider("aws")
 	p.ApplyFn = testApplyFn
@@ -6428,10 +6432,6 @@ func TestContext2Apply_varsEnv(t *testing.T) {
 		},
 	})
 
-	// Set the env var
-	old := tempEnv(t, "TF_VAR_ami", "baz")
-	defer os.Setenv("TF_VAR_ami", old)
-
 	w, e := ctx.Validate()
 	if len(w) > 0 {
 		t.Fatalf("bad: %#v", w)
diff --git a/terraform/interpolate.go b/terraform/interpolate.go
index 96c2c7521..15b51fcb2 100644
--- a/terraform/interpolate.go
+++ b/terraform/interpolate.go
@@ -49,11 +49,6 @@ func (i *Interpolater) Values(
 		}
 		for _, v := range mod.Config().Variables {
 			for k, val := range v.DefaultsMap() {
-				envKey := VarEnvPrefix + strings.TrimPrefix(k, "var.")
-				if v := os.Getenv(envKey); v != "" {
-					val = v
-				}
-
 				result[k] = ast.Variable{
 					Value: val,
 					Type:  ast.TypeString,