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Item 2. Management’s Discussion and Analysis

2026-07-06 compared with 2026-04-15 · 293 added, 319 removed, 18 unchanged (97% of the section changed)

Management’s 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.

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.

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 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.

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.

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

Moreover, neither the Sponsor, nor any other person assumes responsibility for the accuracy or completeness of the forward-looking

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, 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.

(“NYSE Arca” or the “Exchange”).

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.

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 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;

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.

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 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;

SEC registration

SEC registration fees;

printing and mailing costs;

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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.

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 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.

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.

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 management

fee to the Sponsor (the "Sponsor's Management Fee") and any other Trust expenses and liabilities not assumed by the Sponsor.

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.

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 management fee to the Sponsor (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 Management Fee, which may be facilitated by one or more Liquidity Providers.

European Union Carbon Emission Allowances (“EUAs”)

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.

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.

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

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.

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.

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.

Currently, the EU ETS is in Phase IV.

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 the period December 1, 2025 to February 28,

2026, no Shares were issued in exchange for EUAs and no Shares were redeemed in exchange for EUAs.

The Trust’s NAV per Share began

the period at $19.20 and ended the period at $16.21.

The change in net assets from operations for the

period December 1, 2025 to February 28, 2026 was $(2.99) per share, which was due to (i) payment of the Sponsor’s Management Fee

of $3,720, (ii) interest income earned on short-term investments of $171, and (iii) a net change in unrealized depreciation on investment

in EUAs of ($295,252).

Other than the Sponsor’s Management Fee the Trust had no expenses during the period December 1, 2025 to February

Below is a comparison of per Share net asset value

(“NAV”) to the Shares’ market value for the period from December 1, 2025 to February 28, 2026.

Trust NAV vs.

Trust Closing Price - December

1, 2025 - February 28, 2026

During the period of December 1, 2025 through

February 28, 2026 the market for European Union Allowances (EUA) traded in a range of $78.69 (February 16, 2026) to $104.60 (January 15,

2026) with the closing price on February 27, 2026 of $79.96.

There were a variety of influences on the price in the EUA market.

those factors influencing EUA prices during the period were:

(i) the ongoing tightening of allowance supply driven by the emissions cap

reduction schedule and Market Stability Reserve withdrawals;

(ii) record speculative long positioning by investment funds, which amplified

price swings in both directions;

(iii) the relative mildness of winter temperatures across Northern Europe through January 2026, which

moderated near-term power demand and reduced compliance buying pressure;

(iv) ongoing uncertainty regarding economic conditions and industrial

activity within the EU;

(v) macroeconomic and currency dynamics resulting from trade policy discussions between the United States and

the European Union;

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 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

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

the period March 1, 2026 to May 31, 2026, no Shares were issued in exchange for EUAs and no Shares were redeemed in exchange for EUAs.

The Trust’s NAV per Share began the period at $16.21 and ended the period at $18.40.

change in net assets from operations for the period March 1, 2026 to May 31, 2026 was $2.19 per share, which was due to (i) payment of

the Sponsor’s Management Fee of $3,311, (ii) interest income earned on short-term investments of $137, and (iii) a net change in

unrealized appreciation on investment in EUAs of $221,921.

Other than the Sponsor’s Management Fee the Trust had no expenses during

the period March 1, 2026 to May 31, 2026.

the period December 1, 2025 to May 31, 2026, no Shares were issued in exchange for EUAs and no Shares were redeemed in exchange for EUAs.

The Trust’s NAV per Share began the period at $19.20 and ended the period at $18.40.

change in net assets from operations for the period December 1, 2025 to May 31, 2026 was $(0.80) per share, which was due to (i) payment

of the Sponsor’s Management Fee of $7,031, (ii) interest income earned on short-term investments of $308, and (iii) a net change

in unrealized depreciation on investment in EUAs of ($73,331).

Other than the Sponsor’s Management Fee the Trust had no expenses

during the period December 1, 2025 to May 31, 2026.

is a comparison of per Share net asset value (“NAV”) to the Shares’ market value for the period from March 1, 2026

to May 31, 2026.

Trust Closing Price - March 1, 2026 - May 31, 2026

the period of March 1, 2026 through May 31, 2026 the market for European Union Allowances (EUA) traded in a range of $72.34 (March 19,

2026) to $92.75 (May 29, 2026) with the closing price on May 29, 2026 of $92.75.

There were a variety of influences on the price in the

Some of those factors influencing EUA prices during the period were:

(i) the ongoing tightening of allowance supply driven

by the emissions cap reduction schedule and Market Stability Reserve withdrawals;

(ii) record speculative long positioning by investment

funds, which amplified price swings in both directions;

(iii) the relative mildness of winter and spring temperatures across Northern

Europe, which moderated near-term power demand and reduced compliance buying pressure;

(iv) ongoing uncertainty regarding economic conditions

and industrial activity within the EU;

(v) macroeconomic and currency dynamics resulting from trade policy discussions between the United

States and the European Union;

(vi) continued evolution of the Ukraine-Russia conflict and its impact on natural gas supply and pricing

the emergence of politically-driven regulatory risk surrounding the upcoming ETS revision, which intensified materially following the

Antwerp Summit.

Going forward, the Sponsor expects the primary drivers of EUA price levels to continue to be:

(i) overall weather patterns

and their impact on European power demand;

with the additional impact of hostilities in the Middle East compounding these pressures;

and (vii) the ongoing implications of politically-driven

regulatory risk surrounding the upcoming ETS revision, which intensified materially following the Antwerp Summit.

Going forward, the

Sponsor expects the primary drivers of EUA price levels to continue to be:

(i) overall weather patterns and their impact on European

power demand;

(ii) aggregate EU industrial activity;

(iii) the outcome of the EU ETS legislative revision

process, expected to be formally initiated in Q3 2026;

(iv) the ongoing Ukraine-Russia conflict and its effect on energy prices and EU

industrial cost structures;

and (v) the continued pace of institutional investor positioning in EUAs and the extent to which speculative

long positions are maintained, reduced, or reversed in response to political developments.

It should be noted In mid-January 2026, following

(iii) the outcome of the EU ETS legislative revision process, expected to take place

during Q3 2026;

(iv) the ongoing Ukraine-Russia conflict and its effect on energy prices and EU industrial cost structures;

(v) the continued

pace of institutional investor positioning in EUAs and the extent to which speculative long positions are maintained, reduced, or reversed

in response to political developments;

and (vi) the length of the Middle East conflict and the overall supply of oil.

Following ongoing

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.

Generally speaking, for the first two months of

the quarter the market price of the Shares tracked closely to the NAV per Share.

On February 11, an industrial competitiveness conference

was held in Antwerp where public comments were made about the future structure of the EU ETS.

Following these comments, a period of uncertainty

and increased volatility caused the market price to decouple from the NAV with the market price trading at a premium to the NAV.

believes this is the result of the limited number of shares outstanding and the small public float.

Over time, as more Shares are issued,

we expect the frequency and magnitude of the trading premiums and discounts to NAV to decline.

In the period December 1, 2025 to February 28,

2026, no Shares were created, no Shares were redeemed, and no EUAs were sold to maintain a cash position in line with fund policy.

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 of Shares.

At February 28, 2026, the number of EUAs owned

by the Trust and held at the Union Registry was 19,700, with a market value of $1,605,267 based on the Daily EUA Futures price determined

by the ICE Endex on February 28, 2026.

Calculating NAV

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

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

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.

fluctuations and now react swiftly to any headline indicating policy movements.

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 at the end of 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.

ongoing volatility created by policy uncertainty contributed to a notable shift in how the Trust’s Shares traded relative to NAV over

the period, moving from a premium to a discount.

On February 11, 2026, an industrial competitiveness conference held in Antwerp prompted

public comments regarding the future structure of the EU ETS, which contributed to a subsequent decline in EUA prices and, in turn, the

Because of the limited number of Shares outstanding and the small public float, the market price of the Shares adjusted

to this decline only gradually.

As a result, the Shares initially traded at a premium to NAV, as the market price lagged the decline

in NAV, and then, as the market price caught up over the following weeks while NAV recovered, the same limited liquidity carried the

Shares to a discount to NAV by the end of the period.

Management believes these trading dynamics are primarily the result of the limited

number of Shares outstanding and the small public float.

Over time, as more Shares are issued, we expect the frequency and magnitude

of the trading premiums and discounts to NAV to decline.

the period December 1, 2025 to May 31, 2026, no Shares were created, no Shares were redeemed, and no 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

May 31, 2026, the number of EUAs owned by the Trust and held at the Union Registry was 19,700, with a market value of $1,827,188 based

on the Daily EUA Futures price determined by the ICE Endex on May 31, 2026.

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);

Dividing 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

on each trading day.

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.

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 investments.

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.

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.

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 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 the Trust’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 Management 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 February 28, 2026, the Trust held $16,816 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’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 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.

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 the Trust’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 Management 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, 2026,

the Trust held $13,754 in cash & cash equivalents.

Sheet Arrangements

Trust does not have any off-balance sheet arrangements.

Trust is obligated to pay 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.

parties cannot anticipate the amount of future 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

Not applicable to Smaller Reporting Companies.

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