[BUG] remote-settings.json env keys silently ignored when ~/.claude/settings.json also defines env

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 both ~/.claude/remote-settings.json (server-managed, delivered from the Claude.ai admin console) and ~/.claude/settings.json (user) define an env block, the local env block wins wholesale and any keys present only in remote-settings.json are silently dropped. This is the opposite of documented precedence (settings, admin-setup), which states managed/server settings are the highest priority tier.

Specifically, env is not deep-merged — only permissions.allow / permissions.deny are documented as merging across scopes. So if env keys are split across scopes, the lower-priority scope's whole object replaces the higher-priority one (or some equivalent failure mode), with no warning.

Concrete repro from my setup (OTel telemetry):

Admin console push → ~/.claude/remote-settings.json:

{
  "env": {
    "CLAUDE_CODE_ENABLE_TELEMETRY": "1",
    "OTEL_EXPORTER_OTLP_ENDPOINT": "https://otel-collector-stg.example.internal:443",
    "OTEL_EXPORTER_OTLP_HEADERS": "Authorization=Bearer <REDACTED>",
    "OTEL_EXPORTER_OTLP_PROTOCOL": "http/protobuf",
    "OTEL_METRICS_EXPORTER": "otlp",
    "OTEL_METRICS_INCLUDE_VERSION": "true"
  }
}

Local ~/.claude/settings.json (same keys except OTEL_EXPORTER_OTLP_HEADERS):

{
  "env": {
    "CLAUDE_CODE_ENABLE_TELEMETRY": "1",
    "OTEL_EXPORTER_OTLP_ENDPOINT": "https://otel-collector-stg.example.internal:443",
    "OTEL_EXPORTER_OTLP_PROTOCOL": "http/protobuf",
    "OTEL_METRICS_EXPORTER": "otlp",
    "OTEL_METRICS_INCLUDE_VERSION": "true"
  }
}

Result: OTLP exporter connects to the endpoint but sends no Authorization header. The collector (configured to require the bearer header) drops all requests. No warning, no log, no /status indication that an env key was suppressed.

Fix: I manually copied OTEL_EXPORTER_OTLP_HEADERS into ~/.claude/settings.json. Data appeared in the collector immediately, confirming the local env block had wholly shadowed the remote one.

What Should Happen?

Either:

1. env from remote-settings.json should win per documented precedence (managed > user), OR
2. env objects should deep-merge across scopes (per-key), like a sensible config-layering system, OR
3. At minimum, surface a warning when env keys are dropped due to scope conflict, and document the actual merge behavior in the settings docs.

Option 2 is most ergonomic for orgs that want to push shared config (endpoint, auth) from the console while letting devs override individual keys locally.

Error Messages/Logs

# No errors surfaced in the Claude Code session.
# OTel collector logs (sanitized) showed unauthenticated requests being rejected:
#   "msg":"auth failed","error":"missing Authorization header"
# until OTEL_EXPORTER_OTLP_HEADERS was duplicated into ~/.claude/settings.json.

Steps to Reproduce

1. As an admin on a Claude for Teams/Enterprise plan, push an env block via the admin console containing OTEL_* keys including OTEL_EXPORTER_OTLP_HEADERS.
2. Wait for ~/.claude/remote-settings.json to sync on a developer machine (verify via cat ~/.claude/remote-settings.json — should contain the full env block including HEADERS).
3. In ~/.claude/settings.json, add an env block with OTEL_ keys but omit* OTEL_EXPORTER_OTLP_HEADERS.
4. Run any Claude Code session. Observe OTLP requests reach the collector endpoint without the Authorization header. If the collector requires the header, all telemetry is dropped.
5. Add OTEL_EXPORTER_OTLP_HEADERS to ~/.claude/settings.json matching the value in remote-settings.json. Data flows immediately — confirming the remote env was being shadowed wholesale, not deep-merged.

Claude Model

Not sure / Multiple models

Is this a regression?

I don't know

Last Working Version

_No response_

Claude Code Version

2.1.128 (Claude Code)

Platform

Anthropic API

Operating System

macOS

Terminal/Shell

iTerm2

Additional Information

Related issues:

• #44640 — Original report (now closed) on server-managed settings from admin console not syncing to Claude Code CLI. The sync itself now works for me (remote-settings.json is delivered and contains the expected env block), but the merge with local user settings is broken in the way described above. Filing this as a separate bug since the surface symptom differs from the closed issue.
• #46204 — OTel on managed accounts (telemetry never initializes; different symptom but same code path consumes remote-settings.json).
• #50037 — settings.json env keys silently stripped under PROVIDER_MANAGED_BY_HOST (reverse direction, same "silent env-override with no warning" pattern).
• #17017 — Scope replace-vs-merge bug, applied to permissions arrays (same bug class — scopes don't merge as users expect).