Where should the XDG_CONFIG_HOME variable be defined?

You don't need to define it anywhere, unless you want to change the default.

XDG Base Directory Specification clearly says:

If $XDG_CONFIG_HOME is either not set or empty, a default equal to $HOME/.config should be used.

So it is redundant to define it to the default value. All compliant applications will already use $HOME/.config

But, if you do want to change the default in a Debian/Ubuntu system, a suitable (but not the only and possibly not the best) place is:

• For a system-wide change, affecting all users: /etc/profile
• For your user only: ~/.profile

In Arch Linux, this is defined by /etc/profile, using a /etc/profile.d script.

For Debian/Ubuntu, if there's a /etc/profile.d – create a similar script inside; if such a directory does not exist – edit /etc/profile itsef.

export XDG_CONFIG_HOME="$HOME/.config"

The /etc/environment file is parsed by pam_env, which treats it as simple name=value assignments. However, it also has /etc/security/pam_env.conf, which supports variable expansion and can be used for this purpose.

I've found that it works best to set environment variables via PAM. For modern Linux distos, this means /etc/environment or $HOME/.pam_environment (see man pam_env). You can also set them in /etc/security/pam_env.conf using a special syntax. Here is how I set my XDG variables in /etc/security/pam_env.conf.

XDG_CACHE_HOME  DEFAULT=@{HOME}/.xdg/cache
XDG_CONFIG_HOME DEFAULT=@{HOME}/.xdg/config
XDG_DATA_HOME   DEFAULT=@{HOME}/.xdg/data
XDG_STATE_HOME  DEFAULT=@{HOME}/.xdg/state

Previously I would set these variables in /etc/profile.d/custom.sh. However, some applications start before that file is read. Switching to the PAM method solved the issue for multiple applications that behaved this way.

For Zsh users, define it in your .zshenv ~/.zprofile file

export XDG_CONFIG_HOME="${XDG_CONFIG_HOME:-$HOME/.config}"