diff --git a/vscode-extension/src/extension.ts b/vscode-extension/src/extension.ts
index 507da634f..5eececff7 100644
--- a/vscode-extension/src/extension.ts
+++ b/vscode-extension/src/extension.ts
@@ -59,7 +59,7 @@ export function activate(context: vscode.ExtensionContext) {
     vscode.commands.registerCommand(
       COMMANDS.SETUP_ENVIRONMENT_VARIABLES,
       () => {
-        vscode.window.showInformationMessage("Will implement next PR");
+        setupEnvironmentVariables(context);
       }
     )
   );
@@ -716,6 +716,86 @@ async function checkPip() {
   });
 }
 
+/**
+ * Creates an .env file (or opens it if it already exists) to define environment variables
+ * 1) If .env file exists:
+ *    a) Add helper lines on how to add common API keys (if not currently present)
+ * 2) If .env file doesn't exist
+ *    b) Add template file containing helper lines from 1a above
+ */
+async function setupEnvironmentVariables(context: vscode.ExtensionContext) {
+  // Use home dir because env variables should be global. I get the argument
+  // for having in the workspace dir. I personally feel this is more
+  // annoying to setup every time you create a new project when using the
+  // same API keys, but I can do whatever option you want, not hard to
+  // implement
+  const homedir = require("os").homedir(); // This is cross-platform: https://stackoverflow.com/a/9081436
+  const defaultEnvPath = path.join(homedir, ".env");
+
+  const envPath = await vscode.window.showInputBox({
+    prompt: "Enter the path of your .env file",
+    value: defaultEnvPath,
+    validateInput: (text) => {
+      if (!text) {
+        return "File path is required";
+      } else if (!text.endsWith(".env")) {
+        return "File path must end in .env file";
+      }
+      // TODO: Check that file path is a "/.env" file (linux) or "\.env" (Windows)
+
+      // TODO: Check that env path is contained within workspace hierarchy
+      // (Ex: can't have .env file in a sibling dir otherwise AIConfig
+      // loadenv can't read it)
+      return null;
+    },
+  });
+
+  if (!envPath) {
+    vscode.window.showInformationMessage(
+      "Environment variable setup cancelled"
+    );
+    return;
+  }
+
+  if (fs.existsSync(envPath)) {
+    vscode.window.showInformationMessage(
+      "Env file already exists, will implement next PR"
+    );
+  } else {
+    // Create the .env file from the sample
+    const envTemplatePath = vscode.Uri.joinPath(
+      context.extensionUri,
+      "static",
+      "env_template.env"
+    );
+
+    try {
+      await vscode.workspace.fs.copy(
+        envTemplatePath,
+        vscode.Uri.file(envPath),
+        { overwrite: false }
+      );
+    } catch (err) {
+      vscode.window.showErrorMessage(
+        `Error creating new file ${envTemplatePath}: ${err}`
+      );
+    }
+
+    const doc = await vscode.workspace.openTextDocument(envPath);
+    if (doc) {
+      vscode.window.showTextDocument(doc, {
+        preview: false,
+        // Tried using vscode.ViewColumn.Active but that overrides existing
+        // walkthrough window
+        viewColumn: vscode.ViewColumn.Beside,
+      });
+      vscode.window.showInformationMessage(
+        "Please define your environment variables."
+      );
+    }
+  }
+}
+
 async function shareAIConfig(
   context: vscode.ExtensionContext,
   aiconfigEditorManager: AIConfigEditorManager
diff --git a/vscode-extension/static/env_template.env b/vscode-extension/static/env_template.env
new file mode 100644
index 000000000..d75aee355
--- /dev/null
+++ b/vscode-extension/static/env_template.env
@@ -0,0 +1,15 @@
+# Uncomment the following lines to set these common env variables for 
+# accessing generative AI models. If your model requires other env variables
+# you can also set those in this file
+
+## Used for models from OpenAI such as Chat GPT and Dall-E
+## You can get your api key from https://platform.openai.com/api-keys
+# OPENAI_API_KEY=<your key here>
+
+## Used for models from Google such as Gemini and Gemma
+## You can get your api key from https://ai.google.dev/tutorials/setup
+# GOOGLE_API_KEY=<your key here> 
+
+## Used for models hosted on Hugging Face: https://huggingface.co/models
+## You can get your token from https://huggingface.co/settings/tokens
+# HUGGING_FACE_API_TOKEN=<your_token_here>