Final answer:
To set the x.y tolerance as 500 feet for the Clip tool in an ArcGIS model, the ArcGIS user should use the tool-level settings. This is the correct level of environment setting to override default settings for a specific tool within a model.
Step-by-step explanation:
When an ArcGIS user wants to set the x.y tolerance as 500 feet for the Clip tool within a model, they are interested in altering the geoprocessing environment settings that affect how the tool runs. In ArcGIS, environment settings can be specified at different levels which are as follows: application-level, tool-level, model-level, and program-level.
To override the default settings specifically for a tool within a model, the appropriate level is the tool-level settings.
Therefore, the correct answer to the question 'What is the minimum environment setting level to override the default settings?' would be B. tool-level settings. This allows the user to set a specific tolerance for the Clip tool that will be used during the execution of that particular model only, rather than altering the settings application-wide or at any broader level.