I don't see anything else in the text to support an interpretation of 'champagne' alluding to explosives.
Dedalus' father and his friend seem to be harking back to a story from some years previously, so it is possible that it is a tale which dates back to the 1860/70s when Champagne was changing no longer being a drink purely of the elite, but of the commercial middle classes.
All quotations in this answer are taken from Robert Graham Harding's Doctoral Thesis 'The establishment of champagne in Britain, 1860–1914'
most informed contemporaries agreed that the great majority of
consumers were incapable of judging the quality of different champagnes. The market
began to segment: lower-price wines for public dinners, race meetings and public or
semi-public events; higher-priced and heavily branded wines for dinner parties where
social capital was on display.
The drive for this increase came from a combination of fashion and changes in alcohol duty in the UK:
Nineteenth-century champagne was a wine made new through English agency. In 1800,
champagne was as often still as sparkling. When sparkling, it was almost universally
sweet – a wine to be drunk after rather than with food. In colour it was grey or amber (even red). By 1900 champagne in Britain was typically pale gold, unequivocally sparkling, almost universally dry and principally drunk with savoury dishes in restaurants and at home. Young elite males in London’s West End clubs initiated these changes in the 1850s and French producers adapted their wine to meet the evolving demands of what became their most important market.
The drinkers also changed. The revised duty structures that Gladstone’s budgets of
1860-62 put in place sparked a fifteen-year boom in light (i.e. unfortified) wine. Total wine consumption more than doubled by the mid-1870s before falling slowly to 1914.
This increased demand and opened up space in the market for mass counterfeiting. Producers were attempting to develop brands more strongly to guard against outright fakes and similarly named products.
Before 1850, ‘champagne’ was a decidedly elastic term and, frequently, a decidedly dubious liquid. In the strictest sense, champagne was understood by contemporaries to be sparkling wine produced in the Champagne region of France. However, it was being used as a generic term for ‘sparkling wine’ of all forms from at least the 1820s. In the 1850s large quantities of counterfeit champagne were being made
in England from imported French grapes or even rhubarb.
Recourse for manufacturers and importers of genuine champagne was originally limited do to the lack of protection of the name 'champagne'.
The difficulties faced by the major houses in protecting against adulteration and
passing off were compounded by the lack of any legal protection for the term
‘champagne’ itself. The British Merchandise Marks Act and common usage accepted that
the term ‘champagne’ could be freely used provided that the label bore some further
indication of the place of origin. This weakness was not remedied until a series of court cases in France in the 1880s and 1890s.
Until then the term ‘champagne’ was in effect a generic. As Ridley’s put it in 1892: ‘To the British consumer every White Sparkling Wine is Champagne of a kind, be it known as German, Swiss, Italian, or what not.’That distributors and merchants of all stripes were able to make unfettered use of the term was both a cause and a consequence of the spread of the ‘champagne’ habit beyond its traditional market of wealthy elites. By capitalising on these weaknesses of champagne in the 1860s, second-tier shippers in France and distributors and merchants in Britain made lower-priced ‘champagne’ both popular and popularly available. Some of this wine would have been made from grapes grown outside the Champagne region; some from British gooseberries, rhubarb or pears.[...........]
At the very bottom end of the market were counterfeit wines supposedl
made from ‘sugar, and the juices of pears, gooseberries or birch juice’ or even
‘petroleum’.
This might be enough to account for the lack of any qualifying quotation marks around the word 'champagne' in the passage in question.
Champagne was increasing wildly in popularity at this time:
There is little precise data on British imports or sales of champagne before the 1860s but, according to Simon, 117,000 gallons of champagne were imported in 1835. By the early 1860s, the data suggest that consumption in Britain was around 450,000 gallons, a quadrupling of the market. This figure accords well with the 1864 claim made by the gourmandising barrister, A.V. Kirwan, that consumption of champagne had doubled since 1848.
It seems eminently likely against this picture, that Christy, the Inn Keeper who is later noted as being 'nearly lopsided now with roguery', might indulge in the attempt to produce a sparkling vintage of rhubarb, gooseberry and petroleum in order to fleece a few fellows.
