diff --git a/src/vs/workbench/api/browser/mainThreadTerminalService.ts b/src/vs/workbench/api/browser/mainThreadTerminalService.ts
index 56d4075670c..38faa64474d 100644
--- a/src/vs/workbench/api/browser/mainThreadTerminalService.ts
+++ b/src/vs/workbench/api/browser/mainThreadTerminalService.ts
@@ -139,7 +139,8 @@ export class MainThreadTerminalService implements MainThreadTerminalServiceShape
 				: undefined,
 			extHostTerminalId: extHostTerminalId,
 			isFeatureTerminal: launchConfig.isFeatureTerminal,
-			isExtensionOwnedTerminal: launchConfig.isExtensionOwnedTerminal
+			isExtensionOwnedTerminal: launchConfig.isExtensionOwnedTerminal,
+			useShellEnvironment: launchConfig.useShellEnvironment
 		};
 		const terminal = this._terminalService.createTerminal(shellLaunchConfig);
 		this._extHostTerminalIds.set(extHostTerminalId, terminal.instanceId);
diff --git a/src/vs/workbench/api/common/extHost.protocol.ts b/src/vs/workbench/api/common/extHost.protocol.ts
index 3bea115021f..6f5283ef893 100644
--- a/src/vs/workbench/api/common/extHost.protocol.ts
+++ b/src/vs/workbench/api/common/extHost.protocol.ts
@@ -463,6 +463,7 @@ export interface TerminalLaunchConfig {
 	isExtensionCustomPtyTerminal?: boolean;
 	isFeatureTerminal?: boolean;
 	isExtensionOwnedTerminal?: boolean;
+	useShellEnvironment?: boolean;
 }
 
 export interface MainThreadTerminalServiceShape extends IDisposable {
diff --git a/src/vs/workbench/api/common/extHostTerminalService.ts b/src/vs/workbench/api/common/extHostTerminalService.ts
index be6ce95e65f..1deba734389 100644
--- a/src/vs/workbench/api/common/extHostTerminalService.ts
+++ b/src/vs/workbench/api/common/extHostTerminalService.ts
@@ -36,7 +36,7 @@ export interface IExtHostTerminalService extends ExtHostTerminalServiceShape, ID
 	onDidWriteTerminalData: Event<vscode.TerminalDataWriteEvent>;
 
 	createTerminal(name?: string, shellPath?: string, shellArgs?: string[] | string): vscode.Terminal;
-	createTerminalFromOptions(options: vscode.TerminalOptions, isFeatureTerminal?: boolean): vscode.Terminal;
+	createTerminalFromOptions(options: vscode.TerminalOptions, internalOptions?: ITerminalInternalOptions): vscode.Terminal;
 	createExtensionTerminal(options: vscode.ExtensionTerminalOptions): vscode.Terminal;
 	attachPtyToTerminal(id: number, pty: vscode.Pseudoterminal): void;
 	getDefaultShell(useAutomationShell: boolean): string;
@@ -45,6 +45,11 @@ export interface IExtHostTerminalService extends ExtHostTerminalServiceShape, ID
 	getEnvironmentVariableCollection(extension: IExtensionDescription, persistent?: boolean): vscode.EnvironmentVariableCollection;
 }
 
+export interface ITerminalInternalOptions {
+	isFeatureTerminal?: boolean;
+	useShellEnvironment?: boolean;
+}
+
 export const IExtHostTerminalService = createDecorator<IExtHostTerminalService>('IExtHostTerminalService');
 
 export class ExtHostTerminal {
@@ -123,12 +128,13 @@ export class ExtHostTerminal {
 		strictEnv?: boolean,
 		hideFromUser?: boolean,
 		isFeatureTerminal?: boolean,
-		isExtensionOwnedTerminal?: boolean
+		isExtensionOwnedTerminal?: boolean,
+		useShellEnvironment?: boolean
 	): Promise<void> {
 		if (typeof this._id !== 'string') {
 			throw new Error('Terminal has already been created');
 		}
-		await this._proxy.$createTerminal(this._id, { name: this._name, shellPath, shellArgs, cwd, env, icon, initialText, waitOnExit, strictEnv, hideFromUser, isFeatureTerminal, isExtensionOwnedTerminal });
+		await this._proxy.$createTerminal(this._id, { name: this._name, shellPath, shellArgs, cwd, env, icon, initialText, waitOnExit, strictEnv, hideFromUser, isFeatureTerminal, isExtensionOwnedTerminal, useShellEnvironment });
 	}
 
 	public async createExtensionTerminal(iconPath?: URI | { light: URI; dark: URI } | ThemeIcon): Promise<number> {
@@ -335,7 +341,8 @@ export abstract class BaseExtHostTerminalService extends Disposable implements I
 	}
 
 	public abstract createTerminal(name?: string, shellPath?: string, shellArgs?: string[] | string): vscode.Terminal;
-	public abstract createTerminalFromOptions(options: vscode.TerminalOptions): vscode.Terminal;
+	public abstract createTerminalFromOptions(options: vscode.TerminalOptions, internalOptions?: ITerminalInternalOptions): vscode.Terminal;
+
 	public getDefaultShell(useAutomationShell: boolean): string {
 		const profile = useAutomationShell ? this._defaultAutomationProfile : this._defaultProfile;
 		return profile?.path || '';
@@ -785,7 +792,7 @@ export class WorkerExtHostTerminalService extends BaseExtHostTerminalService {
 		throw new NotSupportedError();
 	}
 
-	public createTerminalFromOptions(options: vscode.TerminalOptions): vscode.Terminal {
+	public createTerminalFromOptions(options: vscode.TerminalOptions, internalOptions?: ITerminalInternalOptions): vscode.Terminal {
 		throw new NotSupportedError();
 	}
 }
diff --git a/src/vs/workbench/api/node/extHostDebugService.ts b/src/vs/workbench/api/node/extHostDebugService.ts
index d09a89d23c8..193490ea7b0 100644
--- a/src/vs/workbench/api/node/extHostDebugService.ts
+++ b/src/vs/workbench/api/node/extHostDebugService.ts
@@ -98,7 +98,10 @@ export class ExtHostDebugService extends ExtHostDebugServiceBase {
 					name: args.title || nls.localize('debug.terminal.title', "debuggee"),
 				};
 				giveShellTimeToInitialize = true;
-				terminal = this._terminalService.createTerminalFromOptions(options, true);
+				terminal = this._terminalService.createTerminalFromOptions(options, {
+					isFeatureTerminal: true,
+					useShellEnvironment: true
+				});
 				this._integratedTerminalInstances.insert(terminal, shellConfig);
 
 			} else {
diff --git a/src/vs/workbench/api/node/extHostTerminalService.ts b/src/vs/workbench/api/node/extHostTerminalService.ts
index 8173c051ff2..8b70a2fb70f 100644
--- a/src/vs/workbench/api/node/extHostTerminalService.ts
+++ b/src/vs/workbench/api/node/extHostTerminalService.ts
@@ -6,7 +6,7 @@
 import { withNullAsUndefined } from 'vs/base/common/types';
 import { generateUuid } from 'vs/base/common/uuid';
 import { IExtHostRpcService } from 'vs/workbench/api/common/extHostRpcService';
-import { BaseExtHostTerminalService, ExtHostTerminal } from 'vs/workbench/api/common/extHostTerminalService';
+import { BaseExtHostTerminalService, ExtHostTerminal, ITerminalInternalOptions } from 'vs/workbench/api/common/extHostTerminalService';
 import type * as vscode from 'vscode';
 
 export class ExtHostTerminalService extends BaseExtHostTerminalService {
@@ -24,7 +24,7 @@ export class ExtHostTerminalService extends BaseExtHostTerminalService {
 		return terminal.value;
 	}
 
-	public createTerminalFromOptions(options: vscode.TerminalOptions, isFeatureTerminal?: boolean): vscode.Terminal {
+	public createTerminalFromOptions(options: vscode.TerminalOptions, internalOptions?: ITerminalInternalOptions): vscode.Terminal {
 		const terminal = new ExtHostTerminal(this._proxy, generateUuid(), options, options.name);
 		this._terminals.push(terminal);
 		terminal.create(
@@ -37,8 +37,9 @@ export class ExtHostTerminalService extends BaseExtHostTerminalService {
 			/*options.waitOnExit*/ undefined,
 			withNullAsUndefined(options.strictEnv),
 			withNullAsUndefined(options.hideFromUser),
-			withNullAsUndefined(isFeatureTerminal),
-			true
+			withNullAsUndefined(internalOptions?.isFeatureTerminal),
+			true,
+			withNullAsUndefined(internalOptions?.useShellEnvironment)
 		);
 		return terminal.value;
 	}