Docker compose v2.6.0+ has started reading additional .env files from other locations than the first one found. 2.5.1 and earlier read the file only from the first location found.

Steps to reproduce the issue:

1. Create a directory project
2. Create a subdirectory project/sub
3. In sub create a compose.yaml file (with any services you like)
4. In sub create a .env file, with COMPOSE_FILE=compose.yaml
5. In project create a .env file with COMPOSE_FILE=sub/compose.yaml
6. In project run docker compose ps (or any other compose command)

Describe the results you received:
I get the error:

stat /home//project/compose.yaml: no such file or directory

Compose tried to read the compose file from the COMPOSE_FILE variable as it is set in the .env file in the sub directory (i.e. COMPOSE_FILE=compose.yaml, even though it has previously read the .env file from the working directory (project), and initially it did set the COMPOSE_FILE variable as it was in that file (i.e. COMPOSE_FILE=sub/compose.yaml).

Describe the results you expected:
I expected that the .env file in the location of the first COMPOSE_FILE is not read at all, as it was in 2.5.1, especially since compose has already read a .env file. Thus compose reads the .env file in the current directory, sees that it needs to read sub/compose.yaml and correctly runs the given command with that file.

Compose should not read more than one .env file.

Additional information you deem important (e.g. issue happens only occasionally):
As I wrote, this expected behaviour has been observed throughout the v2 series, until it broke in 2.6.0.

This does not just affect the COMPOSE_FILE variable, but all variables found in the .env files (e.g. COMPOSE_PROJECT_NAME etc).

The workaround is to run docker compose --env-file .env <command>. Then only the given .env file is read, the extra .env file is not read.

I use this in a project where there is an customized override file in a given directory, along with a .env file which specifies the 'main' compose file(s) as well as the extra one. My .env file looks like:

COMPOSE_PROJECT_NAME=tests-tds-$CI_PIPELINE_ID
COMPOSE_FILE=../../docker-compose.yml:../../docker-compose.dev.yml:docker-compose.yml

And ../../.env contains different settings, used for general development (e.g. COMPOSE_FILE=docker-compose.yml:docker-compose.dev.yml:docker-compose.local-sources.yml).

Output of docker compose version:

Docker Compose version v2.6.0

And also

Docker Compose version v2.6.1

Output of docker info:

Client:
 Context:    default
 Debug Mode: false
 Plugins:
  app: Docker App (Docker Inc., v0.9.1-beta3)
  buildx: Docker Buildx (Docker Inc., v0.8.2-docker)
  compose: Docker Compose (Docker Inc., v2.6.1)
  compose251: Docker Compose (Docker Inc., v2.5.1)
  compose261: Docker Compose (Docker Inc., v2.6.1)
  scan: Docker Scan (Docker Inc., v0.17.0)

Server:
 Containers: 6
  Running: 0
  Paused: 0
  Stopped: 6
 Images: 4
 Server Version: 20.10.17
 Storage Driver: overlay2
  Backing Filesystem: extfs
  Supports d_type: true
  Native Overlay Diff: true
  userxattr: false
 Logging Driver: json-file
 Cgroup Driver: cgroupfs
 Cgroup Version: 1
 Plugins:
  Volume: local
  Network: bridge host ipvlan macvlan null overlay
  Log: awslogs fluentd gcplogs gelf journald json-file local logentries splunk syslog
 Swarm: inactive
 Runtimes: io.containerd.runc.v2 io.containerd.runtime.v1.linux runc
 Default Runtime: runc
 Init Binary: docker-init
 containerd version: 10c12954828e7c7c9b6e0ea9b0c02b01407d3ae1
 runc version: v1.1.2-0-ga916309
 init version: de40ad0
 Security Options:
  apparmor
  seccomp
   Profile: default
 Kernel Version: 5.4.0-121-generic
 Operating System: Ubuntu 20.04.4 LTS
 OSType: linux
 Architecture: x86_64
 CPUs: 2
 Total Memory: 7.586GiB
 Name: docker-ce-ubuntu-8gb-hel1-1
 ID: K7HL:KDUU:QK3Z:RUS7:TRBA:LVHY:TXKT:ZO5K:B3ZP:4KVF:7CZW:4457
 Docker Root Dir: /var/lib/docker
 Debug Mode: false
 Registry: https://index.docker.io/v1/
 Labels:
 Experimental: false
 Insecure Registries:
  127.0.0.0/8
 Live Restore Enabled: false

WARNING: No swap limit support

Additional environment details: