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The /etc/environment is loaded in ssh session after a reboot of the instance.
This also explains why this doesn't happen for any other user name except for alpine: in that case the 00-alpine-user-group.sh boot script will delete the alpine user created by cloud-init and reboot the instance.
Restarting the sshd service does not make a difference; it requires a reboot to fix itself.
Note: /etc/environment is loaded via PAM, but I couldn't find anything to force a reload.