Is there an xp penalty for using Arctic Air?

Since Arctic Air can confuse enemies, is there an xp penalty when defeating an enemy that is confused by arctic air?

There's no xp penalty per se, but confused enemies will attack each other, and any damage they do will decrease the reward you get.

There is never a penalty for defeating a confused enemy. The "penalty" is from confused enemies dealing damage to your target, and it's basically the same as if another player hd come along and poked your foes a couple times.

Using Arctic Air technically will reduce your XP/kill a bit, BUT the XP share taken by confused foes is smaller than that taken by players, the confused foes are also slowed, meaning they attack each other less than they might otherwise, and any "lost" XP is offset by you spending less downtime healing (since you were attacked less), and the fact that you'll be working off less debt (since it helps mitigate a LOT of damage).

In other words, yes you might "lose" a tiny amount of XP by using Arctic Air, but you'd be a fool to skip it for that reason.

Just be sure to slot properly to deal with the HUGE End cost. I couldn't run it until I had it and Stamina both 3-slotted with SOs.

http://wiki.cohtitan.com/wiki/Confuse

Shows a graph. Confused foes damage loses you less XP than damage from a non-teamed player.

Over time, the XP loss per mob is made up by faster (and safer) defeating

I never ever noticed the XP loss from Arctic Air while playing my Ice/Psi Dominator. Why? Because I'd fight groups two or three times the size of what I could have fought without AA, and socketed it with every damage proc I could get my mitts on. Nowadays, I duo that Dom with a Grav/Kin controller in AE and we routinely take on three groups set for 8 players at a time and rarely break a sweat. Arctic Air is supercooled awesome sauce.

What if you're fighting a Red Cap and a Fir Bolg comes along and damages it? Which reward graph do you get?

pretty sure it'd be the same as a confused dude coming and wacking it.
falling damage also counts against your xp, I noticed once when I saw something fall for like -1 and that particular enemy yielded less XP compared to his buddies.