[BUG] settings.json `env` block not injected into hook subprocesses when running with --output-format stream-json (e.g. Cursor extension)

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

When claude is invoked with --output-format stream-json --input-format stream-json (which is how the Cursor / VS Code extension launches it), environment variables defined under the env block in ~/.claude/settings.json are not injected into hook subprocesses spawned during the session. Same claude binary in interactive CLI mode injects them as expected.

This breaks tools that rely on the env block to configure hooks — e.g. observability tooling that ships pre-baked hooks and expects OTEL_SERVICE_NAME / similar settings to flow through.

What Should Happen?

Both runs should show OTEL_SERVICE_NAME=test-marker-12345 in the hook subprocess env, since the documented behavior of env is "Environment variables to set for Claude Code sessions" (per claude-code-settings.schema.json).

Error Messages/Logs

Steps to Reproduce

1. Add to ~/.claude/settings.json:

``json
{
"env": {
"OTEL_SERVICE_NAME": "test-marker-12345"
},
"hooks": {
"SessionStart": [
{
"hooks": [{
"type": "command",
"command": "{ echo \"=== entrypoint=${CLAUDE_CODE_ENTRYPOINT:-?} ===\"; env | grep -E '^OTEL_SERVICE_NAME=' || echo '(absent)'; } >> /tmp/hook-env-test.log 2>&1"
}]
}
]
}
}
``

1. Run claude in a terminal, then /exit.
2. Run claude --output-format stream-json --input-format stream-json --verbose < /dev/null (this is roughly what the Cursor extension does), or just open the Cursor extension and start a new Claude Code session.
3. Check /tmp/hook-env-test.log.

Claude Model

None

Is this a regression?

I don't know

Last Working Version

_No response_

Claude Code Version

2.1.123

Platform

Anthropic API

Operating System

macOS

Terminal/Shell

Cursor

Additional Information

• macOS 15.x (Darwin 25.4.0)
• Claude Code 2.1.123 (CLI: ~/.local/bin/claude)
• Claude Code 2.1.138 (Cursor extension: ~/.cursor/extensions/anthropic.claude-code-2.1.138-darwin-arm64/resources/native-binary/claude)
• Cursor v1.x with the Anthropic Claude Code extension