I like this system overall, but this particular aspect seems like a mistake [0] to me. Instead of a simple rule like "use these envars", it has this more complicated logic that must be replicated in all apps supported by all developers. Users would have more agency if they could inform apps of their preferences by simply setting some envars. [1] If this simpler, more user-friendly regime had been in the spec, we would have seen better adoption initially and also two decades later.

[0] of course one shouldn't assume that a totalitarian decision is a mistake, because it's just as likely that the decision-maker has priorities other than "support users"

[1] yes of course users have agency with respect to where XDG is implemented, but the simpler rule would also have given them agency with respect to whether it is implemented

And the variables should not be set if the user/distro wants the default (probably to force developers to handle the default case which is needed for compatibility anyway).