diff --git a/sqlmesh/cli/project_init.py b/sqlmesh/cli/project_init.py
index b6dc5050bc..87d77da4b9 100644
--- a/sqlmesh/cli/project_init.py
+++ b/sqlmesh/cli/project_init.py
@@ -7,6 +7,7 @@
 from sqlmesh.integrations.dlt import generate_dlt_models_and_settings
 from sqlmesh.utils.date import yesterday_ds
 from sqlmesh.utils.errors import SQLMeshError
+from sqlmesh.core.config.common import VirtualEnvironmentMode
 
 from sqlmesh.core.config.common import DBT_PROJECT_FILENAME
 from sqlmesh.core.config.connection import (
@@ -114,7 +115,13 @@ def _gen_config(
     - ambiguousorinvalidcolumn
     - invalidselectstarexpansion
 """,
-        ProjectTemplate.DBT: f"""# --- Model Defaults ---
+        ProjectTemplate.DBT: f"""# --- Virtual Data Environment Mode ---
+# Enable Virtual Data Environments (VDE) for *development* environments.
+# Note that the production environment in dbt projects is not virtual by default to maintain compatibility with existing tooling.
+# https://sqlmesh.readthedocs.io/en/stable/guides/configuration/#virtual-data-environment-modes
+virtual_environment_mode: {VirtualEnvironmentMode.DEV_ONLY.lower()}
+
+# --- Model Defaults ---
 # https://sqlmesh.readthedocs.io/en/stable/reference/model_configuration/#model-defaults
 model_defaults:
   start: {start or yesterday_ds()}
diff --git a/sqlmesh_dbt/operations.py b/sqlmesh_dbt/operations.py
index f9aae3cdac..e8e443a64a 100644
--- a/sqlmesh_dbt/operations.py
+++ b/sqlmesh_dbt/operations.py
@@ -34,7 +34,6 @@ def run(self, select: t.Optional[str] = None, full_refresh: bool = False) -> Non
 
         self.context.plan(
             select_models=select_models,
-            no_auto_categorization=True,  # everything is breaking / foward-only
             run=True,
             no_diff=True,
             no_prompts=True,
diff --git a/tests/cli/test_project_init.py b/tests/cli/test_project_init.py
index e89e59d90c..12b42705e1 100644
--- a/tests/cli/test_project_init.py
+++ b/tests/cli/test_project_init.py
@@ -3,6 +3,8 @@
 from sqlmesh.utils.errors import SQLMeshError
 from sqlmesh.cli.project_init import init_example_project, ProjectTemplate
 from sqlmesh.utils import yaml
+from sqlmesh.core.context import Context
+from sqlmesh.core.config.common import VirtualEnvironmentMode
 
 
 def test_project_init_dbt(tmp_path: Path):
@@ -22,3 +24,10 @@ def test_project_init_dbt(tmp_path: Path):
     sqlmesh_config = next(f for f in files if f.name == "sqlmesh.yaml")
     assert "model_defaults" in sqlmesh_config.read_text()
     assert "start: " in sqlmesh_config.read_text()
+
+    with (tmp_path / "profiles.yml").open("w") as f:
+        yaml.dump({"jaffle_shop": {"target": "dev", "outputs": {"dev": {"type": "duckdb"}}}}, f)
+
+    ctx = Context(paths=tmp_path)
+    assert ctx.config.model_defaults.start
+    assert ctx.config.virtual_environment_mode == VirtualEnvironmentMode.DEV_ONLY