[Bug] CLI downgrades TERM from xterm-256color to xterm-color — diff highlighting has no colors

[supreeth20]

Describe the bug

The Copilot CLI binary overrides TERM=xterm-256color to TERM=xterm-color (8 colors) when spawning its bash subshells. This causes diff highlighting to show no colors at all — only +/- markers are visible with no red/green background highlighting, making it impossible to review changes.

Screenshot

The diff shows + and - markers but no red/green color highlighting. All text is the same color, making it very difficult to identify changes.

Evidence

The parent copilot process inherits the correct TERM from the terminal:

Parent copilot process:  TERM=xterm-256color, COLORTERM=truecolor
Child bash subprocess:   TERM=xterm-color,    COLORTERM=truecolor

Verified via ps -p <copilot_pid> -E — the parent has xterm-256color, but the spawned bash --norc --noprofile subprocess gets xterm-color (only 8 colors).

Impact

• Diff output shows + and - markers but zero color highlighting (no red/green backgrounds)
• All CLI themes tested (default, high-contrast, dim, colorblind) show the same issue
• Development workflow is blocked — cannot visually review proposed changes
• This works correctly on Windows, where TERM is not overridden

Environment

• Copilot CLI version: 1.0.34 (binary at /opt/homebrew/Caskroom/copilot-cli/1.0.32/copilot)
• OS: macOS (Darwin, Apple Silicon)
• Terminals tested: Ghostty 1.3.1, macOS Terminal.app — same result in both
• Terminal multiplexer: Zellij (but TERM is correct before CLI overrides it)
• Shell: zsh (CLI spawns bash --norc --noprofile)

Steps to reproduce

1. On macOS, confirm terminal has TERM=xterm-256color (e.g. Ghostty, iTerm2, Terminal.app)
2. Launch copilot
3. Ask Copilot to edit any file
4. Observe the diff preview — no color highlighting on added/removed lines
5. Verify inside the CLI session: echo $TERM shows xterm-color instead of the terminal's xterm-256color

Expected behavior

The CLI should preserve the terminal's TERM value (xterm-256color) or at minimum use COLORTERM=truecolor (which IS correctly inherited) for rendering decisions. Diff highlighting should show colored backgrounds for added/removed lines.

Related issues

• Diff highlights entire line now instead of just the changed text #1813 — Diff highlights entire line (users there at least have colors)
• [Bug] Diff highlight colors (added/removed text) broken in v0.0.421 — unreadable on dark terminals #1818 — Diff highlight colors broken (fixed, but those users had colors too)
• code diff are hard to see in dark mode (catpuccin theme on iTerm2) #1847 — Code diffs hard to see in dark mode (fixed)
• [Bug] Text selection highlight has very low contrast on dark terminal backgrounds #2216 — Low contrast text selection