Carbon-Market Fragmentation after Brexit

After Brexit, UK and EU carbon prices diverged, with a UK discount of about €23/tCO₂ emerging in 2023, creating a natural experiment in carbon-market fragmentation. We examine whether this gap redirected CPC Y02 green-technology patenting in CBAM-exposed sectors: steel, cement, aluminium, fertiliser, and hydrogen. Across seven specifications, the estimated effects are consistently Porter-compatible and economically meaningful. However, none remains significant under randomization inference that properly accounts for a single treated country. The most defensible interpretation is a forward-looking response to expected policy developments—such as a future UK CBAM or potential EU–UK ETS relinking—rather than confirmed evidence of a UK-specific causal effect. More broadly, the findings highlight a key lesson for Brexit and other single-jurisdiction studies: firm-level disaggregation can improve precision, but it does not create additional treated clusters; credible inference remains constrained by country-level permutation tests.