diff --git a/poethepoet/env/manager.py b/poethepoet/env/manager.py
index e9c478afd..d5658bb0a 100644
--- a/poethepoet/env/manager.py
+++ b/poethepoet/env/manager.py
@@ -116,6 +116,7 @@ def apply_env_config(
             self._vars[key] = apply_envvars_to_template(
                 value_str, scoped_env, require_braces=True
             )
+            scoped_env.set(key, self._vars[key])
 
     def update(self, env_vars: Mapping[str, Any]):
         # ensure all values are strings
diff --git a/tests/test_env_config.py b/tests/test_env_config.py
index 9d9a2e5ab..a0416002c 100644
--- a/tests/test_env_config.py
+++ b/tests/test_env_config.py
@@ -32,3 +32,23 @@ def test_global_env_templating(temp_pyproject, run_poe_subproc):
     }
     for value in printed_vars.values():
         assert value.endswith(str(project_path)[5:])
+
+
+EXAMPLE_WITH_ENV_COMPOSITION = """
+[tool.poe.env]
+BASE_DIR = "/foo"
+SUBDIR = "${BASE_DIR}/bar"
+FILE = "${SUBDIR}/baz"
+
+[tool.poe.tasks.frobnicate]
+expr = "${FILE}"
+"""
+
+
+def test_substitution_in_envvar(temp_pyproject, run_poe_subproc):
+    project_path = temp_pyproject(EXAMPLE_WITH_ENV_COMPOSITION)
+    result = run_poe_subproc("frobnicate", cwd=project_path)
+
+    assert result.capture == "Poe => ${FILE}\n"
+    assert result.stdout == "/foo/bar/baz\n"
+    assert result.stderr == ""