Keep in mind that the exhaust size is actually 4" on this direct vented heater. The vent pipe is basically a concentric vent, with the area around the internal 4" exhaust pipe being used as the combustion air intake.
I think what you have here is a half-assed attempt at a snorkel kit. Duravent makes a specific snorkel kit for use when a vertical extension is needed. It is referenced in the installation manual posted above.
Yes, that makes sense, even though I did not take apart the 7 inch pipe to confirm that. As the pipe is currently configured it might be missing an air intake, and the UL Listings of the products may have their warranties voided since they were not installed according to modern standards or the manufacturer’s installation instructions.
I could not blow up your pictures, but the arrow below points to the air intake. It should have also been extended vertically using the snorkel kit I referenced above. The kit extends both the exhaust and the intake.
I called out the external piping as an improper installation. It’s unclear to me whether the thimble-type component is configured with an air intake, even though it could be. In the report I didn’t say anything about the air intake.