In our development workflow, our webservers provide environment configuration information to our applications via environment variables (i.e. MAGE_DB_HOST, MAGE_DB_USER etc). This doesn't sit well with Magento's XML based configuration approach.
This little hack allows us to use '$MAGE_DB_HOST' and any other environment variables in our XML configuration files.
You can also specify a default value in case the envvar is missing or empty by appending it with double pipe symbols (e.g. '$MAGE_DB_HOST||localhost').
Example part of our local.xml...
...
<default_setup>
<connection>
<host>$MAGE_DB_HOST</host>
<username>$MAGE_DB_USER</username>
<password>$MAGE_DB_PASS</password>
<dbname>$MAGE_DB_NAME</dbname>
<initStatements><![CDATA[SET NAMES utf8]]></initStatements>
<model><![CDATA[mysql4]]></model>
<type><![CDATA[pdo_mysql]]></type>
<pdoType></pdoType>
<active>1</active>
</connection>
...