Geoprocessing environment settings are additional parameters that affect a tool's results. They differ from normal tool parameters in that they don't appear on a tool's dialog box (with certain exceptions). Rather, they are values you set once using a separate dialog box and are interrogated and used by tools when they are run.
Changing the environment settings is often a prerequisite to performing geoprocessing tasks. For example, you may already be familiar with the Current and Scratch workspace environment settings, which allow you to set workspaces for inputs and outputs. Another example is the Extent environment setting, which allows your analysis to be limited to a specific geographic area, or the Output Coordinate System environment setting, which defines the coordinate system (map projection) for new data.
Only certain environments will be used by an individual tool, but tools use the environments in the same way. For example, all tools that use the output extent environment use it in the same way—they only process features in the output extent. To determine the environments that a tool will use, consult the tool's reference page.