diff --git a/dvc/daemon.py b/dvc/daemon.py
index 48c197bb9..4891680e5 100644
--- a/dvc/daemon.py
+++ b/dvc/daemon.py
@@ -9,6 +9,7 @@ from subprocess import Popen
 
 import dvc.logger as logger
 from dvc.utils import is_binary, fix_env
+from dvc.utils.compat import cast_bytes_py2
 
 
 CREATE_NEW_PROCESS_GROUP = 0x00000200
@@ -78,7 +79,9 @@ def daemon(args):
 
     env = fix_env()
     file_path = os.path.abspath(inspect.stack()[0][1])
-    env["PYTHONPATH"] = os.path.dirname(os.path.dirname(file_path))
+    env["PYTHONPATH"] = cast_bytes_py2(
+        os.path.dirname(os.path.dirname(file_path))
+    )
 
     logger.debug("Trying to spawn '{}' with env '{}'".format(cmd, env))
 
diff --git a/dvc/utils/__init__.py b/dvc/utils/__init__.py
index 7c500a1a4..88cf7dd54 100644
--- a/dvc/utils/__init__.py
+++ b/dvc/utils/__init__.py
@@ -1,7 +1,7 @@
 """Helpers for other modules."""
 
 from __future__ import unicode_literals
-from dvc.utils.compat import str, builtin_str, open
+from dvc.utils.compat import str, builtin_str, open, cast_bytes_py2
 
 import os
 import sys
@@ -195,7 +195,8 @@ def fix_env(env=None):
         lp_key = "LD_LIBRARY_PATH"
         lp_orig = env.get(lp_key + "_ORIG", None)
         if lp_orig is not None:
-            env[lp_key] = lp_orig
+            # NOTE: py2 doesn't like unicode strings in environ
+            env[lp_key] = cast_bytes_py2(lp_orig)
         else:
             env.pop(lp_key, None)
 
diff --git a/dvc/utils/compat.py b/dvc/utils/compat.py
index f59b2fd7d..011928a90 100644
--- a/dvc/utils/compat.py
+++ b/dvc/utils/compat.py
@@ -12,6 +12,27 @@ is_py2 = _ver[0] == 2
 #: Python 3.x?
 is_py3 = _ver[0] == 3
 
+# NOTE: cast_bytes_py2 is taken from https://github.com/ipython/ipython_genutils
+
+# simplified version of ipython_genutils/encoding.py
+DEFAULT_ENCODING = sys.getdefaultencoding()
+
+
+def no_code(x, encoding=None):
+    return x
+
+
+def encode(u, encoding=None):
+    encoding = encoding or DEFAULT_ENCODING
+    return u.encode(encoding, "replace")
+
+
+def cast_bytes(s, encoding=None):
+    if not isinstance(s, bytes):
+        return encode(s, encoding)
+    return s
+
+
 if is_py2:
     from urlparse import urlparse, urljoin  # noqa: F401
     from StringIO import StringIO  # noqa: F401
@@ -27,6 +48,7 @@ if is_py2:
     numeric_types = (int, long, float)  # noqa: F821
     integer_types = (int, long)  # noqa: F821
     input = raw_input  # noqa: F821
+    cast_bytes_py2 = cast_bytes
 
 elif is_py3:
     from urllib.parse import urlparse, urljoin  # noqa: F401
@@ -45,3 +67,4 @@ elif is_py3:
     integer_types = (int,)  # noqa: F821
     input = input  # noqa: F821
     open = open  # noqa: F821
+    cast_bytes_py2 = no_code