I prefer to have the lily pipes to be fully submerged because this allows the current to create the whirlpool effect. I would give it 2-5 cm below the water line. (from the top of the outflow)
Here is a diagram i drew for you.
- Co2 diffuser
As you can see with this set up, the movement of the water pushes the Co2 around the tank for a more effective diffusion.