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, 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"

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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.