The fallacy in your reasoning is that there's also a convention about DISPLAY (namely, it being unset) in a non-X environment.

Depends on what you mean by "non-X environment". Theoretically, any platform could define its own standards/conventions for the use of the DISPLAY variable; X doesn't "own" it. But I don't know of any. Do you? If you're talking about some home-brewed application that uses DISPLAY for its own purposes — well, the author (and users) of such a thing are SOL for potentially conflicting with X. And this is one of the reasons why Global Variables Are Evil. :-)