Running initctl as root broken

This implies you are logging into a graphical session as root. In which case, you will be running upstart as a Session Init to manage that root graphical session. So, to switch to managing the system instead, yes you will need to unset UPSTART_SESSION.

As you say, sudo does not suffer from the issue, neither does logging in as root via a console (as would commonly be done on server systems) since no Session Init is started.

As outlined in the Trusty Release notes [1], you can also specify --system to the initctl command as an alternative to unsetting UPSTART_SESSION.

[1] - https://wiki.ubuntu.com/TrustyTahr/ReleaseNotes/TechnicalOverviewUpstart.

The expected behaviour when running as root is always to manage the system. Perhaps a method of forwarding initctl commands to the system init if session init failed?

Actually, this also affects users with an Upstart user instance that `su` into root.

Confirm this.
Using elevated privileges (like setuid) with upstart also impossible for user without cleaning environment.

The expectation here, is that root user is able to control any user-sessions of any user, by setting appropriate UPSTART_SESSION variable.

If you wish to control system init, please either:
1) pass --system argument
2) unset, or set to empty UPSTART_SESSION

Alternatively we can fix this by:
1) if root, use system init irrespective of UPSTART_SESSION environment variable
2) if root, and "--session" argument is passed, operate against UPSTART_SESSION or bail out if one was not specified / does not exist.

Fix number 1 would be my preference. It seems natural to me that root should be able to, by default, affect the system settings and not just its own.