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Item 2. Management’s Discussion and Analysis

2025-10-15 compared with 2025-07-15 · 291 added, 239 removed, 14 unchanged (97% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

information should be read in conjunction with the financial statements and notes included in Item 1 of Part I of this Quarterly

The discussion and analysis which follows may contain trend analysis and other forward- looking statements within the

meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to future

events and financial results.

In some cases, you can identify such forward-looking statements by terminology such as

“may,” “will,” “should,” “expect,” “plan,” “anticipate,”

“believe,” “estimate,” “predict,” “potential” or the negative of these terms or

other comparable terminology.

All statements (other than statements of historical fact) included in this Quarterly Report that

address activities, events or developments that may occur in the future, including such matters as changes in asset prices and

market conditions (for EUAs and the Shares), the Trust’s operations, the Sponsor’s plans and references to the

Trust’s future success and other similar matters are forward-looking statements.

Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the financial

statements and notes included in Item 1 of Part I of this Quarterly Report.

The discussion and analysis which follows may contain trend

analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which

reflect our current views with respect to future events and financial results.

In some cases, you can identify such forward-looking statements

by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,”

“believe,” “estimate,” “predict,” “potential” or the negative of these terms or other

comparable terminology.

All statements (other than statements of historical fact) included in this Quarterly Report that address activities,

events or developments that may occur in the future, including such matters as changes in asset prices and market conditions (for EUAs

and the Shares), the Trust’s operations, the Sponsor’s plans and references to the Trust’s future success and other

similar matters are forward-looking statements.

These statements are only predictions.

events or results may differ materially.

These statements are based upon certain assumptions and analyses made by the Sponsor on the

basis of its perception of historical trends, current conditions and expected future developments, as well as other factors it

believes are appropriate in the circumstances.

Whether or not actual results and developments will conform to the Sponsor’s

expectations and predictions, however, is subject to a number of risks and uncertainties, including the special considerations

discussed in this Quarterly Report, general economic, market and business conditions, changes in laws or regulations, including

those concerning taxes, made by governmental authorities or regulatory bodies, and other world economic and political developments.

See “Risk Factors.” Consequently, all the forward-looking statements made in this Quarterly Report are qualified by

these cautionary statements, and there can be no assurance that the actual results or developments the Sponsor anticipates will be

realized or, even if substantially realized, that they will result in the expected consequences to, or have the expected effects on,

the Trust’s operations or the value of the Shares.

Moreover, neither the Sponsor, nor any other person assumes responsibility

for the accuracy or completeness of the forward-looking statements.

Neither the Trust nor the Sponsor undertakes an obligation to

publicly update or conform to actual results any forward-looking statement, whether as a result of new information, future

Actual events or results may differ materially.

These statements are based upon certain assumptions and analyses made by the Sponsor on the basis of its perception of historical trends,

current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances.

or not actual results and developments will conform to the Sponsor’s expectations and predictions, however, is subject to a number

of risks and uncertainties, including the special considerations discussed in this Quarterly Report, general economic, market and business

conditions, changes in laws or regulations, including those concerning taxes, made by governmental authorities or regulatory bodies, and

other world economic and political developments.

See “Risk Factors.” Consequently, all the forward-looking statements made

in this Quarterly Report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments

the Sponsor anticipates will be realized or, even if substantially realized, that they will result in the expected consequences to, or

have the expected effects on, the Trust’s operations or the value of the Shares.

Moreover, neither the Sponsor, nor any other person

assumes responsibility for the accuracy or completeness of the forward-looking statements.

Neither the Trust nor the Sponsor undertakes

an obligation to publicly update or conform to actual results any forward-looking statement, whether as a result of new information, future

developments or otherwise, except as required by law.

Advisors Physical European Carbon Allowance Trust (the “Trust”) was formed as a Delaware statutory trust on January 12,

The Trust is governed by the Amended and Restated Declaration of Trust and Trust Agreement (“Trust Agreement”)

dated November 27, 2023 between COtwo Advisors LLC (the “Sponsor”) and Wilmington Trust, National Association (the

“Trustee”), and a “Sponsor Agreement,” dated December 21, 2023, between the Trust and the Sponsor.

issues common units of beneficial interest, or “Shares,” which represent units of fractional undivided beneficial

interest in the Trust’s net assets.

Trust Overview

COtwo Advisors Physical European Carbon Allowance Trust (the “Trust”)

was formed as a Delaware statutory trust on January 12, 2023.

The Trust is governed by the Amended and Restated Declaration of Trust and

Trust Agreement (“Trust Agreement”) dated November 27, 2023 between COtwo Advisors LLC (the “Sponsor”) and Wilmington

Trust, National Association (the “Trustee”), and a “Sponsor Agreement,” dated December 21, 2023, between the Trust

and the Sponsor.

The Trust issues common units of beneficial interest, or “Shares,” which represent units of fractional undivided

beneficial interest in the Trust’s net assets.

The Shares of the Trust are listed for trading on NYSE Arca, Inc.

or the “Exchange”).

Sponsor, COtwo Advisors LLC, is a Delaware limited liability company.

The Sponsor’s mailing address is 140 Elm Street, Suite 6,

New Canaan, CT 06840.

The Trust pays the Sponsor a management fee.

The Trust is managed and controlled by the Sponsor pursuant to the

terms of the Trust Agreement and the Sponsor Agreement.

The Sponsor arranged for the creation of the Trust, the registration of the Shares

for their public offering in the United States and the listing of the Shares on the Exchange.

The Sponsor also paid the costs of the

Trust’s organization and the initial sale of the Shares, including applicable SEC registration fees.

In exchange for the management

fee, the Sponsor has agreed to assume to pay all of the routine operational, administrative and other ordinary expenses of the Trust,

including, but not limited to, the following administrative and marketing expenses incurred by the Trust:

each of the Trustee’s,

Trust administrator’s, Trust cash custodian’s, Trust transfer agent’s and marketing agent’s monthly fee and out-of-pocket

expenses and expenses reimbursable in connection with such service provider’s respective agreement;

the marketing support fees

and expenses;

The Sponsor, COtwo Advisors LLC, is a Delaware limited liability company.

The Sponsor’s mailing address is 140 Elm Street, Suite 6, New Canaan, CT 06840.

The Trust pays the Sponsor a Sponsor Fee.

is managed and controlled by the Sponsor pursuant to the terms of the Trust Agreement and the Sponsor Agreement.

The Sponsor arranged

for the creation of the Trust, the registration of the Shares for their public offering in the United States and the listing of the Shares

on the Exchange.

The Sponsor also paid the costs of the Trust’s organization and the initial sale of the Shares, including applicable

SEC registration fees.

In exchange for the Sponsor Fee, the Sponsor has agreed to assume to pay all of the routine operational, administrative

and other ordinary expenses of the Trust, including, but not limited to, the following administrative and marketing expenses incurred

by the Trust:

each of the Trustee’s, Trust administrator’s, Trust cash custodian’s, Trust transfer agent’s and

marketing agent’s monthly fee and out-of-pocket expenses and expenses reimbursable in connection with such service provider’s

respective agreement;

the marketing support fees and expenses;

exchange listing fees;

4 unchanged sentences

and routine legal expenses.

Overview (continued)

sole Trustee of the Trust is Wilmington Trust, National Association, a national banking association.

The Trustee’s principal offices

are located at 1100 North Market Street, Wilmington, Delaware 19890.

The sole Trustee of the Trust is Wilmington

Trust, National Association, a national banking association.

The Trustee’s principal offices are located at 1100 North Market Street,

Wilmington, Delaware 19890.

The Trustee is unaffiliated with the Sponsor.

The Trustee is the

trustee of the Trust for the sole and limited purpose of fulfilling the requirements of the Delaware Statutory Trust Act (“DSTA”).

The Trustee will accept service of legal process on the Trust in the State of Delaware and will make certain filings under the DSTA.

Under the Trust Agreement, the Trustee has delegated to the Sponsor the exclusive management and control of all aspects of the activities

of the Trust.

April 29, 2025, the initial Form S-1 for the Trust was declared effective by the U.S.

The Trustee is the trustee of the Trust for the sole and limited

purpose of fulfilling the requirements of the Delaware Statutory Trust Act (“DSTA”).

The Trustee will accept service of legal

process on the Trust in the State of Delaware and will make certain filings under the DSTA.

Under the Trust Agreement, the Trustee has

delegated to the Sponsor the exclusive management and control of all aspects of the activities of the Trust.

Overview (continued)

On April 29, 2025, the initial Form

S-1 for the Trust was declared effective by the U.S.

Securities and Exchange Commission (“SEC”).

On June 17, 2025, two Baskets (as defined below) for the Trust were issued representing 100,000 shares.

The Trust began trading on NYSE

Arca on June 20, 2025.

Shares are issued by the Trust only in blocks of 50,000 Shares called “Baskets” in exchange for European Union Carbon Emission

Allowances (“EUAs”) or cash from certain registered broker-dealers (“Authorized Participants”).

Baskets will be

redeemed by the Trust in exchange for the amount of EUAs or cash corresponding to their redemption value.

The Trust issues and redeems

Baskets on an ongoing basis at net asset value (“NAV”) per Share to Authorized Participants who have entered into a contract

with the Sponsor and the Trust’s transfer agent.

investment objective of the Trust is for the Shares to reflect the performance of the price of EU Carbon Emission Allowances for stationary

installations (“EUAs”), less the expenses of the Trust’s operations.

The Trust intends to achieve this objective by

investing substantially all of its assets in EUAs, which are issued via the European Union Emission Trading System (“ETS”)

and permit the holder to emit one ton of carbon dioxide equivalent or other greenhouse gas.

The Trust’s assets will consist of

EUAs and cash.

The Trust may hold cash in connection with cash purchases and redemptions of Shares and it also will occasionally hold

cash for short periods to pay the Sponsor’s management fee and any other Trust expenses and liabilities not assumed by the Sponsor.

The Trust will not hold any assets other than EUAs and cash.

than sales of EUAs to pay certain expenses, discussed below, the Trust may only purchase or sell EUAs in connection with the

purchase (creation) or redemption of Baskets by Authorized Participants.

For a creation in cash, the Authorized Participant will

deliver the cash to the Trust’s account at the Cash Custodian, which the Sponsor will then use to purchase EUAs from a third

party selected by the Sponsor who (1) is not the Authorized Participant and (2) will not be acting as an agent, nor at the

direction, of the Authorized Participant with respect to the delivery of EUAs to the Trust (such third party, a “Liquidity

For a redemption in cash, the Sponsor shall arrange for the EUAs represented by the Basket to be sold to a

Liquidity Provider selected by the Sponsor and the cash proceeds distributed from the Trust’s account at the Cash Custodian to

the Authorized Participant in exchange for its Shares.

In the case of “in-kind” creation or redemption orders for

Shares, Authorized Participants may deliver or direct the delivery of EUAs by third parties, or take delivery or direct the taking

of delivery of EUAs by third parties.

addition to selling EUAs to distribute cash to Authorized Participants redeeming Shares, the Trust may sell EUAs to pay certain expenses

not assumed by the Sponsor (described above), including the Sponsor’s management fee, which may be facilitated by one or more Liquidity

Union Carbon Emission Allowances (“EUAs”)

European Union Emissions Trading System (“EU ETS”) is a “cap and trade” system that caps the total volume of

greenhouse gas (“GHG”) emissions from installations and aircraft operators responsible for around 40% of European Union (“EU”)

GHG emissions.

The EU ETS is administered by the EU Commission, which issues a predefined amount of EUAs through auctions or free allocation.

EUAs entitle the holder to emit one ton of carbon dioxide equivalent or other GHG.

Entities covered by the EU ETS are required to surrender

each year sufficient EUAs to cover all their emissions for the previous year.

2012, EU ETS operations were centralized into a single EU registry operated by the EU Commission (the “Union Registry”),

which covers all countries participating in the EU ETS.

The Union Registry is an online database that holds accounts for all entities

covered by the EU ETS as well as for participants (such as the Trust) not covered under the EU ETS.

An account must be opened in the

Union Registry in order to transact in EUAs and the Union Registry is at all times responsible for holding the EUAs.

The EU ETS is the

largest cap and trade system in the world and covers more than 11,000 power stations and industrial plants in 31 countries, and flights

between airports of participating countries.

is no assurance that cap and trade regimes will continue to exist.

cap and trade may not prove to be an effective method of reduction

in GHG emissions.

As a result or due to other factors, cap and trade regimes may be terminated or may not be renewed upon their expiration.

The EU ETS is organized into a number of phases, each which a predetermined duration.

On June 17, 2025, two Baskets

(as defined below) for the Trust were issued representing 100,000 shares.

The Trust began trading on NYSE Arca on June 20, 2025.

Shares are issued by the Trust only

in blocks of 50,000 Shares called “Baskets” in exchange for European Union Carbon Emission Allowances (“EUAs”)

or cash from certain registered broker-dealers (“Authorized Participants”).

Baskets will be redeemed by the Trust in exchange

for the amount of EUAs or cash corresponding to their redemption value.

The Trust issues and redeems Baskets on an ongoing basis at net

asset value (“NAV”) per Share to Authorized Participants who have entered into a contract with the Sponsor and the Trust’s

transfer agent.

Trust Objective

The investment objective of the Trust

is for the Shares to reflect the performance of the price of EU Carbon Emission Allowances for stationary installations (“EUAs”),

less the expenses of the Trust’s operations.

The Trust intends to achieve this objective by investing substantially all of its assets

in EUAs, which are issued via the European Union Emission Trading System (“ETS”) and permit the holder to emit one ton of

carbon dioxide equivalent or other greenhouse gas.

The Trust’s assets will consist of EUAs and cash.

The Trust may hold cash in

connection with cash purchases and redemptions of Shares and it also will occasionally hold cash for short periods to pay the Sponsor’s

management fee and any other Trust expenses and liabilities not assumed by the Sponsor.

The Trust will not hold any assets other than

EUAs and cash or cash equivalents.

Other than sales of EUAs to pay certain

expenses, discussed below, the Trust may only purchase or sell EUAs in connection with the purchase (creation) or redemption of Baskets

by Authorized Participants.

For a creation in cash, the Authorized Participant will deliver the cash to the Trust’s account at the

Cash Custodian, which the Sponsor will then use to purchase EUAs from a third party selected by the Sponsor who (1) is not the Authorized

Participant and (2) will not be acting as an agent, nor at the direction, of the Authorized Participant with respect to the delivery of

EUAs to the Trust (such third party, a “Liquidity Provider”).

For a redemption in cash, the Sponsor shall arrange for the

EUAs represented by the Basket to be sold to a Liquidity Provider selected by the Sponsor and the cash proceeds distributed from the Trust’s

account at the Cash Custodian to the Authorized Participant in exchange for its Shares.

In the case of “in-kind” creation

or redemption orders for Shares, Authorized Participants may deliver or direct the delivery of EUAs by third parties, or take delivery

or direct the taking of delivery of EUAs by third parties.

In addition to selling EUAs to distribute

cash to Authorized Participants redeeming Shares, the Trust may sell EUAs to pay certain expenses not assumed by the Sponsor (described

above), including the Sponsor’s Sponsor fee, which may be facilitated by one or more Liquidity Providers.

European Union Carbon Emission Allowances

The European Union Emissions Trading

System (“EU ETS”) is a “cap and trade” system that caps the total volume of greenhouse gas (“GHG”)

emissions from installations and aircraft operators responsible for around 40% of European Union (“EU”) GHG emissions.

EU ETS is administered by the EU Commission, which issues a predefined amount of EUAs through auctions or free allocation.

the holder to emit one ton of carbon dioxide equivalent or other GHG.

Entities covered by the EU ETS are required to surrender each year

sufficient EUAs to cover all their emissions for the previous year.

In 2012, EU ETS operations were centralized

into a single EU registry operated by the EU Commission (the “Union Registry”), which covers all countries participating in

The Union Registry is an online database that holds accounts for all entities covered by the EU ETS as well as for participants

(such as the Trust) not covered under the EU ETS.

An account must be opened in the Union Registry in order to transact in EUAs and the

Union Registry is at all times responsible for holding the EUAs.

The EU ETS is the largest cap and trade system in the world and covers

more than 11,000 power stations and industrial plants in 31 countries, and flights between airports of participating countries.

There is no assurance that cap and trade

regimes will continue to exist.

Cap and trade may not prove to be an effective method of reduction in GHG emissions.

As a result or due

to other factors, cap and trade regimes may be terminated or may not be renewed upon their expiration.

The EU ETS is organized into a

number of phases, each which a predetermined duration.

Currently, the EU ETS is in Phase IV.

be no assurance that the EU ETS will enter into a new phase as scheduled.

technologies may arise that may diminish or eliminate the need for cap and trade markets.

Ultimately, the cost of emissions credits is

determined by the cost of actually reducing emissions levels.

If the price of credits becomes too high, it will be more economical for

companies to develop or invest in green technologies, thereby suppressing the demand for credits and adversely affecting the price of

and trade regimes set emission limits (i.e., the right to emit a certain quantity of GHG emissions), which can be allocated or auctioned

to the parties in the mechanism up to the total emissions cap.

This allocation may be larger or smaller than is needed for a stable price

of credits and can lead to large price volatility, which could affect the value of the Trust.

Depending upon the industries of end users

of EUAs, unpredictable demand for their products and services can affect the value of GHG emissions credits.

For example, very mild winters

or very cool summers can decrease demand for electric utilities and therefore require fewer carbon credits to offset reduced production

and GHG emissions.

ability of the GHG emitting companies to pass on the cost of emissions credits to consumers can affect the price of the EUAs.

price of emissions can be passed on to the end customer with little impact upon consumer demand, it is likely that industries may continue

emitting and purchase any shortfall in the market at the prevailing price.

If, however, the producer is unable to pass on the cost, it

may be incentivized to reduce production in order to decrease its need for offsetting emissions credits, which could adversely affect

the price of EUAs and the Trust.

risk related to changes in regulation and enforcement of cap and trade regimes could also adversely affect market behavior.

or other penalties for non-compliance are not enforced, incentives to purchase GHG credits will deteriorate, which could result in a

decline in the price of emissions credits and a drop in the value of the Trust.

In addition, as cap and trade markets develop, new regulation

with respect to these markets may arise, which could have a negative effect on the value and liquidity of the cap and trade markets and

of Operations

April 29, 2025, the Sponsor received a notice of effectiveness from the SEC on Form S-1 for its registration of an indeterminate number

of Shares of the Trust.

During the three months ended May 31, 2025, the Trust had not commenced investment activities nor issued Shares.

In addition, the Trust did not purchase or hold any EUAs or cash during the three months ended May 31, 2025, nor were there any receipts

or disbursements of cash from the Trust during this reporting period.

Also, the Trust did not receive any revenue or capital gains (losses),

or incur any expenses during this reporting period.

incurred in connection with organizing the Trust and the offering of the Shares upon commencement of its trading operations will be paid

by the Sponsor.

Such expenses will not be subject to reimbursement by the Trust.

Trust’s Net Asset Value (NAV) is calculated by:

● Determining

the current market value of the Trust’s total assets;

● Subtracting

any liabilities (which include estimated accrued but unpaid fees and expenses);

that total by the number of outstanding shares.

Administrator calculates the NAV of the Trust once each NYSE Arca trading day.

The NAV for a particular day is released after the

markets close, which is typically 4PM ET.

The Administrator uses the settlement price for the Daily EUA Futures as established by

the ICE Endex.

The ICE Endex determines and releases this value daily shortly after the close of the Calculation Period, generally

by at 5:15pm C.E.T.

The Administrator also converts the value of Euro denominated assets into USD equivalent using published foreign

currency exchange prices by an independent pricing vendor.

Third parties supplying quotations or market data may include, without

limitations, dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of

market information.

the Sponsor determines in good faith that the settlement price of the Daily EUA Future does not reflect an accurate EUA price, then the

Sponsor will instruct the Administrator to employ an alternative method to determine the fair value of the Trust’s assets.

In determining

an alternative fair value method, the Sponsor may consider such criteria as observable market-based inputs, including market quotations

and/or trading platforms on which EUAs or Daily EUA Futures are traded.

Moreover, the terms of the Trust Agreement do not prohibit the

Sponsor from changing the valuation method used to calculate the net asset value of the Trust.

Any such change in the valuation method

could affect the value of the Trust’s shares and investors could suffer a substantial loss on their investment in the Trust.

the event of a material change, the Sponsor will notify shareholders in a prospectus supplement and/or a current report on Form 8-K or

in its annual or quarterly reports, as applicable.

addition, in order to provide updated information relating to the Trust for use by investors and market professionals, an updated

indicative fund value (“IFV”) is made available through on-line information services throughout the core trading session

hours of 9:30 am E.T.

There can be no assurance that the EU ETS

will enter into a new phase as scheduled.

New technologies may arise that may

diminish or eliminate the need for cap and trade markets.

Ultimately, the cost of carbon allowances is determined by the cost of actually

reducing emissions levels.

If the price of credits becomes too high, it will be more economical for companies to develop or invest in

green technologies, thereby suppressing the demand for credits and adversely affecting the price of the Trust.

Cap and trade regimes set emission limits

(i.e., the right to emit a certain quantity of GHG emissions), which can be allocated or auctioned to the parties in the mechanism up

to the total emissions cap.

This allocation may be larger or smaller than is needed for a stable price of credits and can lead to large

price volatility, which could affect the value of the Trust.

Depending upon the industries of end users of EUAs, unpredictable demand

for their products and services can affect the value of GHG emissions credits.

For example, very mild winters or very cool summers can

decrease demand for electric utilities and therefore require fewer carbon credits to offset reduced production and GHG emissions.

The ability of the GHG emitting companies

to pass on the cost of emissions credits to consumers can affect the price of the EUAs.

If the price of emissions can be passed on to

the end customer with little impact upon consumer demand, it is likely that industries may continue emitting and purchase any shortfall

in the market at the prevailing price.

If, however, the producer is unable to pass on the cost, it may be incentivized to reduce production

in order to decrease its need for offsetting emissions credits, which could adversely affect the price of EUAs and the Trust.

Regulatory risk related to changes in

regulation and enforcement of cap and trade regimes could also adversely affect market behavior.

If fines or other penalties for non-compliance

are not enforced, incentives to purchase GHG credits will deteriorate, which could result in a decline in the price of emissions credits

and a drop in the value of the Trust.

In addition, as cap and trade markets develop, new regulation with respect to these markets may

arise, which could have a negative effect on the value and liquidity of the cap and trade markets and the Trust.

Results of Operations

For both the period June 17, 2025 (Date of commencement

of operations) to August 31, 2025 and the period April 29, 2025 (Effective date of the registration statement) to August 31, 2025, 150,000

Shares were issued in exchange for 30,000 EUAs and 0 Shares were redeemed in exchange for 0 EUAs.

The Fund’s NAV per Share began

the period at $16.95 and ended the period at $16.93.

The change in net assets from operations for the

period June 17, 2025 to August 31, 2025 and the period April 29, 2025 to August 31, 2025 was $(0.02) per share, which was due to (i) payment

of the Sponsor’s Fee of $3,875, (ii) net realized loss from EUAs sold to pay expenses of $619, (iii) net realized gain from foreign

currency transactions of $6,657, and (iv) a net change in unrealized depreciation on investment in EUAs of $2,359.

Other than the Sponsor

Fee the Fund had no expenses during the period June 17, 2025 to August 31, 2025 and the period April 29, 2025 to August 31, 2025.

Below is a comparison of per Share net asset value

(“NAV”) to the Shares’ market value for the period from June 20, 2025 (first day of trading), to August 31, 2025.

Price - June 20, 2025 - August 29, 2025

During the period of June 20, 2025 through August

31, 2025 the market for European Union Allowances (EUA) traded in a range of €67.95 (June 30, 2025) to €73.39 (June 24, 2025)

with the closing price on August 29, 2025 of €72.46 and an average value of €70.73.

There were a variety of influences on the

price in the EUA market.

Some of those factors were (i) mild temperatures during the summer months across Europe resulting in lower power

demand for cooling (ii) uncertainty in overall levels of economic productivity resulting from potential tariffs levied by the United States

on the European Union (iii) Currency fluctuations resulting from both interest rate uncertainty and ongoing tariff negotiations (iv) ongoing

conflict between Ukraine and Russia and how that will impact both ongoing economic activity and supply of natural gas in the future.

forward we expect the primary drivers of EUA price levels will continue to be (i) overall weather and how it will impact demand for power

for heating/cooling demands (ii) overall levels of economic activity and how robust the EU economy is (iii) ongoing conflict between Ukraine

and Russia and how that will impact flows and price of natural gas (iv) possible linkage of the United Kingdom Allowance market and the

European Union Allowance market (v) introduction of shipping industry to the EU ETS.

For the most part, the fund NAV and market price

tracked closely.

The periods in which there was a discrepancy are related to the small public float and limited trading in CTWOs equity.

Over time as more shares are issued, we expect the frequency and magnitude of the trading premium/discount to NAV to decline.

In the period June 17, 2025 to August 31, 2025,

150,000 Shares (3 Baskets) were created in exchange for 30,000 EUAs, no Shares were redeemed, and 300 EUAs were sold to maintain a cash

position in line with fund policy.

For accounting purposes, CTWO reflects creations and redemptions on the date of receipt of a notification

of a creation but does not issue Shares until the requisite amount of EUAs are received.

Upon a redemption, CTWO delivers EUAs upon receipt

These creations were completed in the normal course of business.

At August 31, 2025, the number of EUAs owned by

the Trust and held by the Custodians was 29,700, with a market value of $2,516,249 based on the Daily EUA Futures price determined by

the ICE Endex on August 31, 2025 (cost— $2,518,608).

Calculating NAV

The Trust’s Net Asset Value (NAV) is calculated

● Determining the current market value of the Trust’s total

● Subtracting any liabilities (which include estimated accrued

but unpaid fees and expenses);

● Dividing that total by the number of outstanding shares.

The Administrator calculates the NAV of the Trust

once each NYSE Arca trading day.

The NAV for a particular day is released after the markets close, which is typically 4PM ET.

The Administrator

uses the settlement price for the Daily EUA Futures as established by the ICE Endex.

The ICE Endex determines and releases this value

daily shortly after the close of the Calculation Period, generally by at 5:15pm C.E.T.

The Administrator also converts the value of Euro

denominated assets into USD equivalent using published foreign currency exchange prices by an independent pricing vendor.

Third parties

supplying quotations or market data may include, without limitations, dealers in the relevant markets, end-users of the relevant product,

information vendors, brokers and other sources of market information.

If the Sponsor determines in good faith that the

settlement price of the Daily EUA Future does not reflect an accurate EUA price, then the Sponsor will instruct the Administrator to employ

an alternative method to determine the fair value of the Trust’s assets.

In determining an alternative fair value method, the Sponsor

may consider such criteria as observable market-based inputs, including market quotations and/or trading platforms on which EUAs or Daily

EUA Futures are traded.

Moreover, the terms of the Trust Agreement do not prohibit the Sponsor from changing the valuation method used

to calculate the net asset value of the Trust.

Any such change in the valuation method could affect the value of the Trust’s shares

and investors could suffer a substantial loss on their investment in the Trust.

In the event of a material change, the Sponsor will notify

shareholders in a prospectus supplement and/or a current report on Form 8-K or in its annual or quarterly reports, as applicable.

In addition, in order to provide updated information

relating to the Trust for use by investors and market professionals, an updated indicative fund value (“IFV”) is made available

through on-line information services throughout the core trading session hours of 9:30 am E.T.

on each trading day.

The IFV is calculated by using the prior day’s closing NAV per

share of the Trust as a base and updating that value throughout the trading day to reflect changes in the most recently reported

mid-point of the bid/ask spread of the Daily EUA Future traded on the ICE Endex.

The IFV disseminated during the NYSE Arca core

trading session hours should not be viewed as an actual real time update of the NAV, because the NAV is calculated using a different

manner and it is calculated only once at the end of each trading day based upon the relevant end of day values of the Trust’s

should also be noted that although the IFV is disseminated throughout the core trading session, the customary trading hours for

EUAs, the Trust’s primary asset, are 2am to 12 pm ET.

This means that there is a gap in time at the end of each day during

which the Trust’s shares are traded on the NYSE Arca, but real-time trading prices for EUAs are not available.

gaps in time the IFV will be calculated based on the last reported mid-point of the bid-ask spread of the Daily EUA Future in the

immediately preceding the trading session until the day’s settlement price is reported, in which case the day’s

settlement price will be used.

NYSE Arca disseminates the IFV through the facilities of CTA/CQ High Speed Lines.

In addition, the IFV is published on the NYSE Arca’s

website and is available through on-line information services such as Bloomberg.

The Trust, the Sponsor and its affiliates are not involved

in, or responsible for, the calculation or dissemination of the IFV and make no warranty as to its accuracy.

Accounting Estimates

of the financial statements and related disclosures in accordance with U.S.

generally accepted accounting principles requires the

application of appropriate accounting rules and guidance, as well as the use of estimates.

The Trust’s application of these

policies involves judgments and the use of estimates.

Actual results may differ from the estimates used and such differences could

Please refer to Note 2 to the Financial Statements included in this report for further discussion of the Trust’s

accounting policies.

were no material estimates, which involve a significant level of estimation uncertainty and had or are reasonably likely to have had

a material impact on a Fund’s financial condition, used in the preparation of these financial statements.

and Capital Resources

Trust is not aware of any trends, demands, conditions or events that are reasonably likely to result in material changes to its liquidity

In exchange for a fee, the Sponsor has agreed to assume most of the expenses incurred by the Trust.

As a result, the only ordinary

expense of the Trust during the period covered by this report was the Sponsor’s fee.

The Trust intends to satisfy this obligation

through the transfer of cash (generated, if necessary, through the sale of EUAs) in the necessary amount.

At May 31, 2025, the Trust

did not have any cash balances.

Sheet Arrangements

Trust does not have any off-balance sheet arrangements.

Trust is obligated to pay the Sponsor a management fee (the “Sponsor Fee”), calculated daily and paid monthly, equal to

0.79% of the Trust’s average daily net assets.

From the Sponsor Fee, the Sponsor has contractually agreed to pay all of the

routine operational, administrative, and other ordinary expenses of the Trust, excluding brokerage fees, interest expenses, and

certain non-recurring or extraordinary fees and expenses.

The Sponsor Fee is paid in consideration of the Sponsor’s management

services to the Trust.

parties cannot anticipate the amount of payments that will be required under these arrangements for future periods as the NAV and trading

levels to meet investment objectives for the Trust will not be known until a future date.

Quantitative and Qualitative Disclosures About Market Risk

applicable to Smaller Reporting Companies.

IFV is calculated by using the prior day’s closing NAV per share of the Trust as a base and updating that value throughout the trading

day to reflect changes in the most recently reported mid-point of the bid/ask spread of the Daily EUA Future traded on the ICE Endex.

The IFV disseminated during the NYSE Arca core trading session hours should not be viewed as an actual real time update of the NAV, because

the NAV is calculated using a different manner and it is calculated only once at the end of each trading day based upon the relevant end

of day values of the Trust’s investments.

It should also be noted that although the IFV

is disseminated throughout the core trading session, the customary trading hours for EUAs, the Trust’s primary asset, are 2am to

This means that there is a gap in time at the end of each day during which the Trust’s shares are traded on the NYSE Arca,

but real-time trading prices for EUAs are not available.

During such gaps in time the IFV will be calculated based on the last reported

mid-point of the bid-ask spread of the Daily EUA Future in the immediately preceding trading session until the day’s settlement

price is reported, in which case the day’s settlement price will be used.

The NYSE Arca disseminates the IFV through the

facilities of CTA/CQ High Speed Lines.

In addition, the IFV is published on the NYSE Arca’s website and is available through on-line

information services such as Bloomberg.

The Trust, the Sponsor and its affiliates are not involved in, or responsible for, the calculation

or dissemination of the IFV and make no warranty as to its accuracy.

Critical Accounting Estimates

Preparation of the financial statements and related

disclosures in accordance with U.S.

generally accepted accounting principles requires the application of appropriate accounting rules

and guidance, as well as the use of estimates.

The Trust’s application of these policies involves judgments and the use of estimates.

Actual results may differ from the estimates used and such differences could be material.

Please refer to Note 2 to the Financial Statements

included in this report for further discussion of the Trust’s accounting policies.

There were no material estimates, which involve

a significant level of estimation uncertainty and had or are reasonably likely to have had a material impact on a Fund’s financial

condition, used in the preparation of these financial statements.

Liquidity and Capital Resources

The Trust is not aware of any trends, demands,

conditions or events that are reasonably likely to result in material changes to its liquidity needs.

In exchange for a fee, the Sponsor

has agreed to assume most of the expenses incurred by the Trust.

As a result, the only ordinary expense of the Trust during the period

covered by this report was the Sponsor’s fee.

The Trust intends to satisfy this obligation through the transfer of cash (generated,

if necessary, through the sale of EUAs) in the necessary amount.

At August 31, 2025, the Trust held $24,327 in cash & cash equivalents.

Off-Balance Sheet Arrangements

The Trust does not have any off-balance sheet

arrangements.

Sponsor and CTA Fees

The Trust is obligated to pay the Sponsor a management

fee (the “Sponsor Fee”), calculated daily and paid monthly, equal to 0.79% of the Trust’s average daily net assets.

From the Sponsor Fee, the Sponsor has contractually agreed to pay all of the routine operational, administrative, and other ordinary expenses

of the Trust, excluding brokerage fees, interest expenses, and certain non-recurring or extraordinary fees and expenses.

The Sponsor Fee

is paid in consideration of the Sponsor’s management services to the Trust.

The parties cannot anticipate the amount of payments

that will be required under these arrangements for future periods as the NAV and trading levels to meet investment objectives for the

Trust will not be known until a future date.

and Qualitative Disclosures About Market Risk

Not applicable to Smaller Reporting Companies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis