diff --git a/sdk-extensions/incubator/src/main/java/io/opentelemetry/sdk/extension/incubator/fileconfig/FileConfiguration.java b/sdk-extensions/incubator/src/main/java/io/opentelemetry/sdk/extension/incubator/fileconfig/FileConfiguration.java
index 7e5e98344d6..759bab24d65 100644
--- a/sdk-extensions/incubator/src/main/java/io/opentelemetry/sdk/extension/incubator/fileconfig/FileConfiguration.java
+++ b/sdk-extensions/incubator/src/main/java/io/opentelemetry/sdk/extension/incubator/fileconfig/FileConfiguration.java
@@ -51,7 +51,7 @@ public final class FileConfiguration {
 
   private static final Logger logger = Logger.getLogger(FileConfiguration.class.getName());
   private static final Pattern ENV_VARIABLE_REFERENCE =
-      Pattern.compile("\\$\\{([a-zA-Z_][a-zA-Z0-9_]*)(:-([^\n}]*))?}");
+      Pattern.compile("\\${1,2}\\{([a-zA-Z_][a-zA-Z0-9_]*)(:-([^\n}]*))?}");
   private static final ComponentLoader DEFAULT_COMPONENT_LOADER =
       SpiHelper.serviceComponentLoader(FileConfiguration.class.getClassLoader());
 
@@ -317,13 +317,22 @@ private Object constructValueObject(Node node) {
       ScalarStyle scalarStyle = ((ScalarNode) node).getScalarStyle();
       do {
         MatchResult matchResult = matcher.toMatchResult();
-        String envVarKey = matcher.group(1);
-        String defaultValue = matcher.group(3);
-        if (defaultValue == null) {
-          defaultValue = "";
+        newVal.append(val, offset, matchResult.start());
+
+        String ref = val.substring(matchResult.start(), matchResult.end());
+        // $$ indicates that env var reference is escaped. Strip the leading $.
+        if (ref.startsWith("$$")) {
+          newVal.append(ref.substring(1));
+        } else {
+          String envVarKey = matcher.group(1);
+          String defaultValue = matcher.group(3);
+          if (defaultValue == null) {
+            defaultValue = "";
+          }
+          String replacement = environmentVariables.getOrDefault(envVarKey, defaultValue);
+          newVal.append(replacement);
         }
-        String replacement = environmentVariables.getOrDefault(envVarKey, defaultValue);
-        newVal.append(val, offset, matchResult.start()).append(replacement);
+
         offset = matchResult.end();
       } while (matcher.find());
       if (offset != val.length()) {
diff --git a/sdk-extensions/incubator/src/test/java/io/opentelemetry/sdk/extension/incubator/fileconfig/FileConfigurationParseTest.java b/sdk-extensions/incubator/src/test/java/io/opentelemetry/sdk/extension/incubator/fileconfig/FileConfigurationParseTest.java
index 7de63dcb45c..ee7c597baac 100644
--- a/sdk-extensions/incubator/src/test/java/io/opentelemetry/sdk/extension/incubator/fileconfig/FileConfigurationParseTest.java
+++ b/sdk-extensions/incubator/src/test/java/io/opentelemetry/sdk/extension/incubator/fileconfig/FileConfigurationParseTest.java
@@ -656,7 +656,13 @@ private static java.util.stream.Stream<Arguments> envVarSubstitutionArgs() {
         Arguments.of("key1: \"${EMPTY_STR}\"\n", mapOf(entry("key1", ""))),
         Arguments.of("key1: \"${BOOL}\"\n", mapOf(entry("key1", "true"))),
         Arguments.of("key1: \"${INT}\"\n", mapOf(entry("key1", "1"))),
-        Arguments.of("key1: \"${FLOAT}\"\n", mapOf(entry("key1", "1.1"))));
+        Arguments.of("key1: \"${FLOAT}\"\n", mapOf(entry("key1", "1.1"))),
+        // Escaped
+        Arguments.of("key1: $${STR_1}\n", mapOf(entry("key1", "${STR_1}"))),
+        Arguments.of("key1: \"$${STR_1}\"\n", mapOf(entry("key1", "${STR_1}"))),
+        Arguments.of("key1: $${STR_1} ${STR_2}\n", mapOf(entry("key1", "${STR_1} value2"))),
+        Arguments.of("key1: $${STR_1} $${STR_2}\n", mapOf(entry("key1", "${STR_1} ${STR_2}"))),
+        Arguments.of("key1: $${NOT_SET:-value1}\n", mapOf(entry("key1", "${NOT_SET:-value1}"))));
   }
 
   private static <K, V> Map.Entry<K, V> entry(K key, @Nullable V value) {