Kubernetes environment variables are a key feature of the Kubernetes system, allowing for dynamic configuration and decoupling of application code from configuration details. Environment variables can be set in three primary ways: directly in the Pod specification, using ConfigMaps or Secrets. ConfigMaps can hold non-sensitive configuration data in key-value pairs, while Secrets are designed to store sensitive information such as passwords and OAuth tokens. By externalizing configuration using environment variables, Kubernetes enables flexible API deployment across different environments, reducing errors and speeding up release cycles. The use of environment variables also enhances portability and flexibility, allowing for streamlined management of dynamic configurations. Best practices include using ConfigMaps for non-sensitive data and Secrets for sensitive data, establishing clear naming conventions, utilizing the `envFrom` field, maintaining documentation, integrating with CI/CD workflows, regularly reviewing and auditing configurations, and implementing checks to validate environment variable settings.