How to set system environment variable in C#?

The documentation tells you how to do this.

Calling SetEnvironmentVariable has no effect on the system environment variables. To programmatically add or modify system environment variables, add them to the HKEY_LOCAL_MACHINE\System\CurrentControlSet\Control\Session Manager\Environment registry key, then broadcast a WM_SETTINGCHANGE message with lParam set to the string "Environment". This allows applications, such as the shell, to pick up your updates.

So, you need to write to the registry setting that you are already attempting to write to. And then broadcast a WM_SETTINGCHANGE message as detailed above. You will need to be running with elevated rights in order for this to succeed.

Some example code:

using Microsoft.Win32;
using System;
using System.Diagnostics.Contracts;
using System.Runtime.InteropServices;

namespace ConsoleApplication1
{
    class Program
    {
        const int HWND_BROADCAST = 0xffff;
        const uint WM_SETTINGCHANGE = 0x001a;

        [DllImport("user32.dll", SetLastError = true, CharSet = CharSet.Auto)]
        static extern bool SendNotifyMessage(IntPtr hWnd, uint Msg, 
            UIntPtr wParam, string lParam);

        static void Main(string[] args)
        {
            using (var envKey = Registry.LocalMachine.OpenSubKey(
                @"SYSTEM\CurrentControlSet\Control\Session Manager\Environment",
                true))
            {
                Contract.Assert(envKey != null, @"registry key is missing!");
                envKey.SetValue("TEST1", "TestValue");
                SendNotifyMessage((IntPtr)HWND_BROADCAST, WM_SETTINGCHANGE,
                    (UIntPtr)0, "Environment");
            }
        }
    }
}

However, whilst this code does work, the .net framework provides functionality to perform the same task much more simply.

Environment.SetEnvironmentVariable("TEST1", "TestValue", 
    EnvironmentVariableTarget.Machine);

The documentation for the three argument Environment.SetEnvironmentVariable overload says:

If target is EnvironmentVariableTarget.Machine, the environment variable is stored in the HKEY_LOCAL_MACHINE\SYSTEM\ControlSet001\Control\Session Manager\Environment key of the local computer's registry. It is also copied to all instances of File Explorer. The environment variable is then inherited by any new processes that are launched from File Explorer.

If target is User or Machine, other applications are notified of the set operation by a Windows WM_SETTINGCHANGE message.