COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This information should be read together with the financial statements and notes to the financial statements included in this Report. The discussion and analysis that 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 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. 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. 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 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. Consequently, all the forward-looking statements made in this 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. 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. (the “Exchange”) under the ticker symbol “CTWO.” The Sponsor 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 “Sponsor’s 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 U.S. Securities and Exchange Commission (“SEC”) registration fees. In exchange for the Sponsor’s 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; exchange listing fees; SEC registration fees; printing and mailing costs; maintenance expenses for the Trust’s website; audit fees and expenses; and routine legal expenses. 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. On April 29, 2025, the initial Registration Statement on Form S-1 for the Trust (File No. 333-271910) (the “Form S-1”) was declared effective by the SEC. On June 17, 2025, two Baskets (as defined below) for the Trust were issued representing 100,000 Shares. The Trust began trading on the Exchange 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. 24 Trust Objective The investment objective of the Trust is for the Shares to reflect the performance of the price of 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 (“EU 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 not assumed by the Sponsor, including the Sponsor’s Management Fee, 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 State Street Bank and Trust Company (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. Results of Operations From June 17, 2025 (the date of the commencement of operations) to November 30, 2025: ● 150,000 Shares were issued in exchange for 30,000 EUAs; ● 50,000 Shares were redeemed in exchange for 10,000 EUAs; and ● 300 EUAs were sold for cash to pay Trust expenses. After giving effect to these transactions, as of November 30, 2025, the Trust owned 19,700 EUAs held by the European Union Registry (the “Union Registry”). The market value of the Trust’s EUA holdings was $1,900,519 based on the Daily EUA Futures price, as determined by ICE Endex Markets B.V. (the “ICE Endex”) on November 30, 2025. In addition, as of November 30, 2025, the Trust held $20,497 in cash and cash equivalents. November 30, 2025 Total Net Assets $ 1,919,879 Shares Outstanding 100,000 Net Asset Value per Share $ 19.20 Closing Price $ 19.10 25 The Trust’s NAV per Share increased from $16.95 on June 17, 2025 to $19.20 on November 30, 2025. The $2.25 increase in NAV per Share during the period from June 17, 2025 to November 30, 2025, was primarily attributable to (i) a $7,710 Sponsor’s Management Fee expense, (ii) a $28,146 net realized gain from EUAs sold to fund redemptions, (iii) a $618 net realized loss from EUAs sold to pay expenses, (iv) a $6,640 net realized gain from foreign exchange transactions, and (v) a $233,158 net change in unrealized appreciation on investment in EUAs. Other than the Sponsor’s Management Fee, the Trust had no expenses during the period from June 17, 2025 to November 30, 2025. Period ended November 30, 2025 Average daily total net assets $ 2,136,305 Net realized and unrealized loss on EUAs and foreign currency $ 267,326 Interest income earned on cash equivalents $ 378 Net investment income (loss) $ (7,332 ) Weighted average shares outstanding 123,653 Sponsor’s Management Fees $ 7,710 Total fees and other expenses excluding Sponsor’s Management Fees $ 0 Brokerage Commissions $ 0 Total expense ratio 0.79 % Net investment income/(loss) -0.75 % Creation of Shares 150,000 Redemption of Shares 50,000 Premiums and Discounts The graph and chart below present information about the differences between the daily market price for Shares of the Trust and the Trust’s reported NAV per Share for the period from June 20, 2025 (the first day the Shares were traded on the Exchange) to November 30, 2025. The amount that the Trust’s market price is above the reported NAV per Share is called the premium. The amount that the Trust’s market price is below the reported NAV per Share is called the discount. The market price is determined using the midpoint between the highest bid and the lowest offer on the Exchange, as of the time that the Trust’s NAV is calculated (usually 4:00 p.m. Eastern Time (“E.T.”)). Fund NAV vs. Fund Closing Price - June 20, 2025 - November 30, 2025 26 Generally speaking, the market price of the Shares tracked closely to the NAV per Share during the period. Any discrepancies were the result of the Trust’s small public float and limited trading in the Trust’s Shares. Over time, as more Shares are issued, we expect the frequency and magnitude of the trading premiums and discounts to NAV to decline. The performance data above for the Trust represents past performance. Past performance is not a guarantee of future results. Investment return and the value of the Trust’s Shares will fluctuate such that an investor’s Shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than the performance data quoted. Analysis of Movements in the Price of EUAs As movements in the price of EUAs are expected to directly affect the price of the Shares, investors should understand what the recent movements in the price of EUAs have been. Investors, however, should also be aware that past movements in the price of EUAs are not indicators of future movements. This section identifies recent movements in the price of EUAs. The following chart provides historical background on the price of EUAs. The chart illustrates movement in the price of EUAs, reflected in US dollars, for the period from November 28, 2015 to November 28, 2025. Source: Bloomberg During the period from June 17, 2025 to November 30, 2025, EUAs traded in a range of $79.92 (June 30) to $96.49 (Nov 28), with an average value of $87.25. Some of the factors that influenced the price of EUAs during this period, included (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 (“EU”), (iii) currency fluctuations resulting from both interest rate uncertainty and ongoing tariff negotiations, (iv) ongoing conflict between Ukraine and Russia and resulting uncertainty regarding impacts on both ongoing economic activity and the supply of natural gas in the future, and (v) colder than expected fall temperatures causing more heating demand than usual. Going forward we expect the primary drivers of EUA price levels will continue to be (i) overall weather and related impacts on power demands for heating and cooling, (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 the 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, (vi) lower year-over-year auction supplies potentially leading to tighter supplies, (vii) implementation of the Cross Boarder Adjustment Mechanism (CBAM), and (viii) decreasing free allocations of EUAs. 27 In mid-January 2026, following public commentary suggesting possible structural modifications or adjustments to the EU ETS framework, EUA prices experienced significant short-term fluctuations. On January 15, 2026, EUAs traded at an intraday high of approximately $107.57 per EUA, and by February 16, 2026, had declined to an intraday low of approximately $78.49 per EUA, representing a price swing of approximately 27% within a one-month period. Such movements reflect heightened sensitivity of the EUA markets to regulatory signaling and policy uncertainty. Market participants are currently focused on the outcome of the EU’s regularly scheduled comprehensive review of the EU ETS framework, which is expected to conclude in the third quarter of 2026. Until greater clarity is provided regarding the scope and timing of any potential amendments to the program, we expect elevated price volatility in EUAs to persist. Continued uncertainty surrounding the EU ETS framework may impact trading volumes, pricing stability and market liquidity. Sponsor and CTA Fees The Trust is obligated to pay the Sponsor the Sponsor’s Management Fee, calculated daily and paid monthly, equal to 0.79% of the Trust’s average daily net assets. From the Sponsor’s Management 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’s Management Fee is paid in consideration of the Sponsor’s management services to the Trust. The Trust cannot anticipate the amount of any 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. Critical Accounting Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management makes estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amount of revenue and expenses reported during the period. Actual results could differ from these estimates. In addition, please refer to Note 2 to the Financial Statements included in this annual report on Form 10-K (the “Report”) for further discussion of the Trust’s accounting policies. 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 Management Fee. The Trust’s only source of liquidity is its transfers and sales of EUAs. Only an Authorized Participant may engage in creation or redemption transactions directly with the Trust. The Trust has a limited number of institutions that act as Authorized Participants. To the extent that these institutions exit the business or are unable to proceed with creation and/or redemption orders with respect to the Trust and no other Authorized Participant is able to step forward to create or redeem creation units, Shares may trade at a discount to NAV and possibly face trading halts and/or delisting. In addition, a decision by a market maker, lead market maker, or other large investor to cease activities for the Trust or a decision by a secondary market purchaser to sell a significant number of the Trust’s Shares could adversely affect liquidity, the spread between the bid and ask quotes, and potentially the price of the Shares. The Sponsor can make no guarantees that participation by Authorized Participants or market makers will continue. A market disruption, such as a government taking regulatory or other actions that disrupt the market in EUAs, can also make it difficult to liquidate a position. Unexpected market illiquidity may cause major losses to investors at any time or from time to time. In addition, the Trust does not intend at this time to establish a credit facility, which would provide an additional source of liquidity, but instead will rely only on the cash and cash equivalents that it holds to meet its liquidity needs. Off-Balance Sheet Arrangements The Trust does not have any off-balance sheet arrangements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable to smaller reporting companies. Item 8. Financial Statements and Supplementary Data. See Index to Financial Statements on page F-1 for a list of the financial statements being filed therein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 28