How are environment variables set for dbt?

The method of setting environment variables for dbt by prefixing the variable name with "DBT_" in environment settings is correct because this naming convention allows dbt to recognize and utilize these variables at runtime. When you define environmental variables in this format, dbt identifies them as specific configurations that influence its behavior or connect to relevant resources, such as database credentials or project settings.

Using this method provides a straightforward way to manage sensitive information and customize database connections without hardcoding them into the project's configuration files. It also enhances security by keeping environment-sensitive data outside of version-controlled files.

In contrast, while creating a .env file in the project directory is indeed a commonly used practice for storing environment variables, it is less direct compared to the prefixing method. Similarly, utilizing CLI commands or configuration management tools might apply to broader application scenarios but is not the standard method specifically adopted by dbt for variable management.