In Windows 7, to create an environment variable:  

• From the Start Menu, right click on computer and select properties - this will open the System Control Panel

• Select Advanced system settings from the lefthand sidebar - this will open the System Properties window

• Select the Environment Variables button at the bottom of the window

• Add a new variable to either the User or System variables by selecting the New button

• In the dialog: 
  • Variable name is IAR_ARM_BASE
  • Variable value is the path to your EWARM installation, e.g. C:\Program Files (x86)\IAR Systems\Embedded Workbench 7.2

A similar method should work in later versions of Windows.