diff --git a/changelogs/fragments/powershell-addtype-env-vars.yml b/changelogs/fragments/powershell-addtype-env-vars.yml
new file mode 100644
index 00000000000..6c0d73c3cb8
--- /dev/null
+++ b/changelogs/fragments/powershell-addtype-env-vars.yml
@@ -0,0 +1,2 @@
+bugfixes:
+- PowerShell - Ignore the ``LIB`` environment variable when compiling C# Ansible code
diff --git a/lib/ansible/module_utils/powershell/Ansible.ModuleUtils.AddType.psm1 b/lib/ansible/module_utils/powershell/Ansible.ModuleUtils.AddType.psm1
index ba38159d5f1..a4801ba5d5f 100644
--- a/lib/ansible/module_utils/powershell/Ansible.ModuleUtils.AddType.psm1
+++ b/lib/ansible/module_utils/powershell/Ansible.ModuleUtils.AddType.psm1
@@ -332,7 +332,28 @@ Function Add-CSharpType {
 
         # compile the code together and check for errors
         $provider = New-Object -TypeName Microsoft.CSharp.CSharpCodeProvider
-        $compile = $provider.CompileAssemblyFromDom($compile_parameters, $compile_units)
+
+        # This calls csc.exe which can take compiler options from environment variables. Currently these env vars
+        # are known to have problems so they are unset:
+        #   LIB - additional library paths will fail the compilation if they are invalid
+        $originalEnv = @{}
+        try {
+            'LIB' | ForEach-Object -Process {
+                $value = Get-Item -LiteralPath "Env:\$_" -ErrorAction SilentlyContinue
+                if ($value) {
+                    $originalEnv[$_] = $value
+                    Remove-Item -LiteralPath "Env:\$_"
+                }
+            }
+
+            $compile = $provider.CompileAssemblyFromDom($compile_parameters, $compile_units)
+        }
+        finally {
+            foreach ($kvp in $originalEnv.GetEnumerator()) {
+                [System.Environment]::SetEnvironmentVariable($kvp.Key, $kvp.Value, "Process")
+            }
+        }
+
         if ($compile.Errors.HasErrors) {
             $msg = "Failed to compile C# code: "
             foreach ($e in $compile.Errors) {
diff --git a/test/integration/targets/module_utils_Ansible.ModuleUtils.AddType/library/add_type_test.ps1 b/test/integration/targets/module_utils_Ansible.ModuleUtils.AddType/library/add_type_test.ps1
index d89f99b79a4..d6b05691191 100644
--- a/test/integration/targets/module_utils_Ansible.ModuleUtils.AddType/library/add_type_test.ps1
+++ b/test/integration/targets/module_utils_Ansible.ModuleUtils.AddType/library/add_type_test.ps1
@@ -295,5 +295,28 @@ namespace Namespace11
 Add-CSharpType -Reference $arch_class
 Assert-Equals -actual ([Namespace11.Class11]::GetIntPtrSize()) -expected ([System.IntPtr]::Size)
 
+$lib_set = @'
+using System;
+
+namespace Namespace12
+{
+    public class Class12
+    {
+        public static string GetString()
+        {
+            return "b";
+        }
+    }
+}
+'@
+$env:LIB = "C:\fake\folder\path"
+try {
+    Add-CSharpType -Reference $lib_set
+}
+finally {
+    Remove-Item -LiteralPath env:\LIB
+}
+Assert-Equals -actual ([Namespace12.Class12]::GetString()) -expected "b"
+
 $result.res = "success"
 Exit-Json -obj $result