diff --git a/.bazelrc b/.bazelrc
index 4375f437..f6b338c5 100644
--- a/.bazelrc
+++ b/.bazelrc
@@ -4,6 +4,9 @@
 
 test --test_output=errors
 
+# Define value used by tests
+build --define=SOME_VAR=SOME_VALUE
+
 # Load any settings specific to the current user.
 # .bazelrc.user should appear in .gitignore so that settings are not shared with team members
 # This needs to be last statement in this
diff --git a/BUILD.bazel b/BUILD.bazel
index cfda797e..82eed49b 100644
--- a/BUILD.bazel
+++ b/BUILD.bazel
@@ -3,6 +3,7 @@ load("@bazel_gazelle//:def.bzl", "gazelle", "gazelle_binary")
 
 # gazelle:exclude internal_python_deps.bzl
 # gazelle:exclude internal_deps.bzl
+# gazelle:exclude py/tests/
 
 gazelle_binary(
     name = "gazelle_bin",
diff --git a/py/private/BUILD.bazel b/py/private/BUILD.bazel
index 8fb7be54..5c466675 100644
--- a/py/private/BUILD.bazel
+++ b/py/private/BUILD.bazel
@@ -23,6 +23,7 @@ bzl_library(
         ":py_library",
         ":utils",
         "//py/private/venv",
+        "@aspect_bazel_lib//lib:expand_make_vars",
         "@aspect_bazel_lib//lib:paths",
     ],
 )
diff --git a/py/private/py_binary.bzl b/py/private/py_binary.bzl
index d6cd97ee..14616ad7 100644
--- a/py/private/py_binary.bzl
+++ b/py/private/py_binary.bzl
@@ -1,6 +1,7 @@
 "Implementation for the py_binary and py_test rules."
 
 load("@aspect_bazel_lib//lib:paths.bzl", "BASH_RLOCATION_FUNCTION", "to_manifest_path")
+load("@aspect_bazel_lib//lib:expand_make_vars.bzl", "expand_locations", "expand_variables")
 load("//py/private:py_library.bzl", _py_library = "py_library_utils")
 load("//py/private:providers.bzl", "PyWheelInfo")
 load("//py/private:utils.bzl", "PY_TOOLCHAIN", "SH_TOOLCHAIN", "dict_to_exports", "resolve_toolchain")
@@ -18,11 +19,18 @@ def _py_binary_rule_imp(ctx):
     )
 
     env = dict({
-        "BAZEL_TARGET": ctx.label,
+        "BAZEL_TARGET": str(ctx.label),
         "BAZEL_WORKSPACE": ctx.workspace_name,
         "BAZEL_TARGET_NAME": ctx.attr.name,
     }, **ctx.attr.env)
 
+    for k, v in env.items():
+        env[k] = expand_variables(
+            ctx,
+            expand_locations(ctx, v, ctx.attr.data),
+            attribute_name = "env",
+        )
+
     python_interpreter_path = interpreter.python.path if interpreter.uses_interpreter_path else to_manifest_path(ctx, interpreter.python)
 
     common_substitutions = {
diff --git a/py/private/toolchain/BUILD.bazel b/py/private/toolchain/BUILD.bazel
index e15a82f4..84703704 100644
--- a/py/private/toolchain/BUILD.bazel
+++ b/py/private/toolchain/BUILD.bazel
@@ -9,4 +9,5 @@ bzl_library(
     name = "autodetecting",
     srcs = ["autodetecting.bzl"],
     visibility = ["//py:__subpackages__"],
+    deps = ["//py/private:utils"],
 )
diff --git a/py/tests/py-test/BUILD.bazel b/py/tests/py-test/BUILD.bazel
new file mode 100644
index 00000000..ba24dc68
--- /dev/null
+++ b/py/tests/py-test/BUILD.bazel
@@ -0,0 +1,16 @@
+load("//py:defs.bzl", "py_test")
+
+py_test(
+    name = "test_env_vars",
+    srcs = ["test_env_vars.py"],
+    data = [
+        "test_env_vars.py",
+    ],
+    env = {
+        "ONE": "un",
+        "TWO": "deux",
+        "RULEDIR": "$(RULEDIR)",
+        "LOCATION": "$(location :test_env_vars.py)",
+        "DEFINE": "$(SOME_VAR)",
+    },
+)
diff --git a/py/tests/py-test/test_env_vars.py b/py/tests/py-test/test_env_vars.py
new file mode 100644
index 00000000..0941b999
--- /dev/null
+++ b/py/tests/py-test/test_env_vars.py
@@ -0,0 +1,17 @@
+import os
+
+
+def test_env(env, expected):
+    assert env in os.environ, f"Expected environ to have key '{env}'"
+
+    _actual = os.environ.get(env)
+    assert _actual == expected, f"Expected environ key '{env}' to equal '{expected}', but got '{_actual}'"
+
+
+test_env('ONE', 'un')
+test_env('TWO', 'deux')
+test_env('LOCATION', "py/tests/py-test/test_env_vars.py")
+test_env('DEFINE', "SOME_VALUE")
+test_env('BAZEL_TARGET', "//py/tests/py-test:test_env_vars")
+test_env('BAZEL_WORKSPACE', "aspect_rules_py")
+test_env('BAZEL_TARGET_NAME', "test_env_vars")