diff --git a/extensions/vscode-api-tests/package.json b/extensions/vscode-api-tests/package.json
index ef88695c825..3c4c9a5bc30 100644
--- a/extensions/vscode-api-tests/package.json
+++ b/extensions/vscode-api-tests/package.json
@@ -36,6 +36,7 @@
     "taskPresentationGroup",
     "terminalDataWriteEvent",
     "terminalDimensions",
+    "envShellEvent",
     "testCoverage",
     "testObserver",
     "textSearchProvider",
diff --git a/src/vs/workbench/api/common/extHost.api.impl.ts b/src/vs/workbench/api/common/extHost.api.impl.ts
index 3de62a38d34..8fadafd3118 100644
--- a/src/vs/workbench/api/common/extHost.api.impl.ts
+++ b/src/vs/workbench/api/common/extHost.api.impl.ts
@@ -309,6 +309,10 @@ export function createApiFactoryAndRegisterActors(accessor: ServicesAccessor): I
 			get shell() {
 				return extHostTerminalService.getDefaultShell(false);
 			},
+			get onDidChangeShell() {
+				checkProposedApiEnabled(extension, 'envShellEvent');
+				return extHostTerminalService.onDidChangeShell;
+			},
 			get isTelemetryEnabled() {
 				return extHostTelemetry.getTelemetryConfiguration();
 			},
diff --git a/src/vs/workbench/api/common/extHostTerminalService.ts b/src/vs/workbench/api/common/extHostTerminalService.ts
index 22dd7d190ad..4e94afddd1a 100644
--- a/src/vs/workbench/api/common/extHostTerminalService.ts
+++ b/src/vs/workbench/api/common/extHostTerminalService.ts
@@ -39,6 +39,7 @@ export interface IExtHostTerminalService extends ExtHostTerminalServiceShape, ID
 	onDidChangeTerminalDimensions: Event<vscode.TerminalDimensionsChangeEvent>;
 	onDidChangeTerminalState: Event<vscode.Terminal>;
 	onDidWriteTerminalData: Event<vscode.TerminalDataWriteEvent>;
+	onDidChangeShell: Event<string>;
 
 	createTerminal(name?: string, shellPath?: string, shellArgs?: readonly string[] | string): vscode.Terminal;
 	createTerminalFromOptions(options: vscode.TerminalOptions, internalOptions?: ITerminalInternalOptions): vscode.Terminal;
@@ -378,6 +379,8 @@ export abstract class BaseExtHostTerminalService extends Disposable implements I
 	readonly onDidChangeTerminalState = this._onDidChangeTerminalState.event;
 	protected readonly _onDidWriteTerminalData: Emitter<vscode.TerminalDataWriteEvent>;
 	get onDidWriteTerminalData(): Event<vscode.TerminalDataWriteEvent> { return this._onDidWriteTerminalData.event; }
+	protected readonly _onDidChangeShell = new Emitter<string>();
+	readonly onDidChangeShell = this._onDidChangeShell.event;
 
 	constructor(
 		supportsProcesses: boolean,
@@ -811,8 +814,12 @@ export abstract class BaseExtHostTerminalService extends Disposable implements I
 	}
 
 	public $acceptDefaultProfile(profile: ITerminalProfile, automationProfile: ITerminalProfile): void {
+		const oldProfile = this._defaultProfile;
 		this._defaultProfile = profile;
 		this._defaultAutomationProfile = automationProfile;
+		if (oldProfile?.path !== profile.path) {
+			this._onDidChangeShell.fire(profile.path);
+		}
 	}
 
 	private _setEnvironmentVariableCollection(extensionIdentifier: string, collection: EnvironmentVariableCollection): void {
diff --git a/src/vs/workbench/services/extensions/common/extensionsApiProposals.ts b/src/vs/workbench/services/extensions/common/extensionsApiProposals.ts
index 3c8446b2b12..6d0b33157b9 100644
--- a/src/vs/workbench/services/extensions/common/extensionsApiProposals.ts
+++ b/src/vs/workbench/services/extensions/common/extensionsApiProposals.ts
@@ -25,6 +25,7 @@ export const allApiProposals = Object.freeze({
 	documentPaste: 'https://raw.githubusercontent.com/microsoft/vscode/main/src/vscode-dts/vscode.proposed.documentPaste.d.ts',
 	editSessionIdentityProvider: 'https://raw.githubusercontent.com/microsoft/vscode/main/src/vscode-dts/vscode.proposed.editSessionIdentityProvider.d.ts',
 	editorInsets: 'https://raw.githubusercontent.com/microsoft/vscode/main/src/vscode-dts/vscode.proposed.editorInsets.d.ts',
+	envShellEvent: 'https://raw.githubusercontent.com/microsoft/vscode/main/src/vscode-dts/vscode.proposed.envShellEvent.d.ts',
 	extensionRuntime: 'https://raw.githubusercontent.com/microsoft/vscode/main/src/vscode-dts/vscode.proposed.extensionRuntime.d.ts',
 	extensionsAny: 'https://raw.githubusercontent.com/microsoft/vscode/main/src/vscode-dts/vscode.proposed.extensionsAny.d.ts',
 	externalUriOpener: 'https://raw.githubusercontent.com/microsoft/vscode/main/src/vscode-dts/vscode.proposed.externalUriOpener.d.ts',
diff --git a/src/vscode-dts/vscode.proposed.envShellEvent.d.ts b/src/vscode-dts/vscode.proposed.envShellEvent.d.ts
new file mode 100644
index 00000000000..8fed971ef71
--- /dev/null
+++ b/src/vscode-dts/vscode.proposed.envShellEvent.d.ts
@@ -0,0 +1,16 @@
+/*---------------------------------------------------------------------------------------------
+ *  Copyright (c) Microsoft Corporation. All rights reserved.
+ *  Licensed under the MIT License. See License.txt in the project root for license information.
+ *--------------------------------------------------------------------------------------------*/
+
+declare module 'vscode' {
+
+	// See https://github.com/microsoft/vscode/issues/160694
+	export namespace env {
+
+		/**
+		 * An {@link Event} which fires when the default shell changes.
+		 */
+		export const onDidChangeShell: Event<string>;
+	}
+}