All the Unix processes contain an "environment". This is a list of variables that contain name and value, both just strings that can contain most characters. All Unix processes have a parent process - the process that created this process as child. Child processes inherit environment from parent process. They can make some modifications to the environment before passing it in turn to their child processes.
One important environment variable is PATH, a list of directories separated by colons (':'). These directories are searched through to find commands. If you try to invoke command 'foo', all the directories in PATH (in that order) are searched for an executable file 'foo' (one with x-bit on). If a file is found, it is executed.
In this howto, I use term 'command' to refer executable program that is meant to be called with short names, using the path mechanism.
In Linux, even the low level operating system calls to start processes (the exec family of calls) searches through directories in the PATH variable: you can use the path mechanism anywhere where you try to execute a command. If exec operating system call gets a file name that does not contain '/', it evaluates the PATH environment variable. Even if there is no variable PATH in the environment, at least directories /bin and /usr/bin are looked for suitable commands.
In sh you use export command to set environment, in csh you use setenv command. For example:
sh:
PATH=/usr/local/bin:/usr/bin:/bin:/usr/bin/X11:/usr/games:.
setenv PATH /usr/local/bin:/usr/bin:/bin:/usr/bin/X11:/usr/games:.
C-programs can use setenv() library call to change environment. Perl has environment in an associative array %ENV, you can set PATH as $ENV{PATH}="/bin".
env command is the basic way of asking the current environment variables. It can be used to modify it as well.
More information of the basic environment mechanism can be found from manual pages 'environ', 'execl', 'setenv', info file 'env' and documentation of shells.
When Linux boots up, the first normal process that starts is the init process. It is a special process because it does not have parent. However, it is the ancestor of all the other processes. Init environment will remain as environment of all the processes if they do not touch it explicitly. Most processes do touch.
Init starts a group of processes. File /etc/inittab tells what processes the system starts. These processes work in the environment that is directly inherited from init - typically they are processes like 'getty', the program that writes 'login:' to console. If you start PPP connections here, you must remember that you are working in the init environment. The system initialization is often a script that is started here. In Debian 1.3 initialization script /etc/init.d/rc and it calls other initialization scripts in turn.
The system contains many running servers (daemons) that may or may not use the default environment. Most servers are started from the initialization scripts and thus they have the init environment.
When user logs in to the system, the environment is affected by the settings that are compiled into the programs, system wide initialization scripts and user initialization scripts. This is pretty complicated and the current situation is not completely satisfactory. It is totally different if user logs in from text console, XDM or from network.