COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST

COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST Annual Report Summary

Unlock exposure to Europe's carbon market. This summary distills key information about the COTWO ADVISORS PHYSICAL EUROPEAN CARBON ALLOWANCE TRUST (the "Trust" or "CTWO") from its annual report for the fiscal year ended November 30, 2025. We aim to provide retail investors with a clear understanding of the Trust's structure, performance drivers, and the market context in which it operates.

Business Overview

The Trust, trading on the NYSE Arca under the ticker CTWO, offers investors exposure to the price performance of European Carbon Emission Allowances (EUAs). Unlike traditional companies, CTWO does not sell products or services; it physically holds EUAs and a small amount of cash. Its core objective is for its shares to reflect the spot price of EUAs, net of its operating expenses. The Trust uses a passive strategy, holding EUAs to track their value rather than actively trading them based on market predictions.

As of the fiscal year-end on November 30, 2025, the Trust was classified as a "smaller reporting company" and an "emerging growth company." As of February 27, 2026, the Trust's total market value was approximately $1.74 million. With 100,000 shares outstanding, this implied a market price of $17.40 per share on that date. The Trust is incorporated in Germany, and its Sponsor, COtwo Advisors LLC, is based in New Canaan, CT.

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

This section discusses the Trust's financial performance and condition, highlighting key factors that influenced its operations during the fiscal year ended November 30, 2025.

Liquidity and Capital Resources

The Trust maintains a simple financial structure, holding only EUAs and a limited amount of cash. It does not borrow, so it has no debt.

• Cash Management: The Trust holds cash reserves to cover operational expenses, including management fees, and to facilitate the creation and redemption of large blocks of shares (Baskets). The Trust's cash management strategy focuses on maintaining sufficient liquidity for its operational needs without holding excessive cash that could dilute its exposure to EUAs.
• Capital Resources: The Trust's capital resources consist entirely of its net assets, primarily the fair value of its EUA holdings and cash. The Trust generates capital by issuing Baskets of shares in exchange for EUAs and cash, and it may reduce capital by redeeming Baskets. These creation and redemption mechanisms help align the market price of the Trust's shares with its NAV.
• Commitments and Contractual Obligations: The Trust's primary contractual obligation is to pay management fees to the Sponsor and fees to its service providers (e.g., custodian, administrator). The Trust typically pays these obligations from its cash holdings. The Trust discloses no other material long-term commitments or off-balance sheet arrangements.

Risk Factors

Investing in CTWO shares carries several risks, primarily stemming from its direct exposure to the volatile EUA market:

• EUA Price Volatility: Changes in EUA prices directly impact the value of CTWO shares. Economic conditions, energy policies, weather patterns, and speculative trading can all influence these prices.
• Regulatory and Political Risk: Significant changes in European Union Emissions Trading System (EU ETS) regulations, national climate policies, or international agreements could materially affect EUA supply, demand, and price. This includes potential changes to the cap, auctioning rules, or the scope of the EU ETS.
• Market Liquidity Risk: Although EUAs are actively traded, unexpected market events or regulatory changes could affect their liquidity, potentially hindering the Trust's ability to efficiently acquire or dispose of EUAs.
• Tracking Error Risk: As an investment vehicle aiming to track EUA prices, the Trust's share price may not perfectly reflect the underlying EUA price due to operational costs, market inefficiencies, or other factors.
• Counterparty Risk: The Trust relies on third-party custodians for its EUA holdings and cash, which poses a risk. The financial health and operational integrity of these custodians are crucial.
• Cybersecurity Risk: The Trust itself has no employees or IT systems, but it relies on its Sponsor and other service providers (Trustee, Cash Custodian). The Sponsor implements a comprehensive cybersecurity program, including risk assessments, policies, training, and annual reviews of service providers. As of the report date, the Trust identified no material cybersecurity threats affecting it. However, reliance on third-party systems always presents an inherent risk.
• Tax Risk: Changes in tax laws or interpretations in Germany, the EU, or the United States could adversely affect the Trust or its shareholders.
• Operational Risk: While the Trust's operations are passive, inherent risks exist in the administration, custody, and valuation of its assets, including potential errors or failures by service providers.

Competitive Position

The Trust offers unique, direct exposure to physically held European Carbon Allowances, positioning it distinctly within the broader investment landscape.

• Advantages:
  • Direct Physical Exposure: Unlike futures-based carbon products, the Trust holds physical EUAs, eliminating the roll yield risk associated with futures contracts. This provides a more direct correlation to the spot price of EUAs.
  • Accessibility: It offers retail and institutional investors an accessible, regulated, and liquid way to invest in the EU ETS market without directly participating in the underlying allowance market.
  • Transparency: Its transparent holdings and valuation methodology allow investors to understand its underlying assets.
• Disadvantages/Competition:
  • Futures-Based Products: Competing carbon ETFs or funds that use futures contracts may offer different cost structures or exposure profiles, though they introduce roll risk.
  • Other Regional Carbon Markets: Investors seeking carbon exposure might choose products tracking other regional markets (e.g., California's Cap-and-Trade), which have different supply/demand dynamics and regulatory frameworks.
  • ESG Funds: Broader ESG-focused funds may include carbon-intensive industries or companies with strong decarbonization strategies, offering indirect exposure to climate transition themes, but not direct carbon allowance price exposure.
  • Direct Market Participation: Large institutional investors may choose to participate directly in the EU ETS market, bypassing the Trust's expense ratio.

The Trust's competitive advantage lies in its simplicity, physical holding strategy, and regulated exchange listing, making it an attractive option for investors seeking pure-play exposure to the European carbon price.

Future Outlook and Market Trends

The Trust's future performance intrinsically links to the evolution of the European carbon market and the EU ETS. Key trends and regulatory developments include:

• "Fit for 55" Initiative: The EU's ambitious "Fit for 55" initiative aims to cut greenhouse gas emissions by at least 55% by 2030, driving significant changes. The Linear Reduction Factor (LRF), which dictates the annual reduction in the overall emissions cap, will substantially increase from 2.2% to 5.1% in 2024 and 5.38% in 2025. This accelerated reduction in EUA supply is expected to push EUA prices higher.
• Market Stability Reserve (MSR) Reforms: The MSR balances supply and demand in the EUA market. Recent reforms include canceling surplus allowances exceeding 400 million and potentially releasing 75 million allowances if prices become excessively high. These measures aim to prevent extreme price volatility and ensure market stability.
• Expansion of EU ETS: The EU ETS expects to expand its scope to include new sectors like maritime transport, and a separate emissions trading system for buildings and road transport is under establishment. These expansions could influence overall market dynamics and investor interest in carbon allowances.
• Carbon Border Adjustment Mechanism (CBAM): The Carbon Border Adjustment Mechanism (CBAM) imposes a carbon price on certain imported goods. This mechanism aims to prevent "carbon leakage" and could further strengthen EUA demand by leveling the playing field for European industries.
• Auctioning: The continued prevalence of auctioning for EUA allocation, rather than free allocation, contributes to price discovery and provides revenue for EU member states.

These regulatory shifts signal a sustained political commitment to decarbonization, which is expected to tighten EUA supply and potentially support prices. However, future EUA prices remain subject to economic growth, energy policy shifts, and geopolitical events.

Leadership and Strategy

This filing indicates no changes in the Trust's leadership or its core investment strategy. The strategy remains consistent: to passively hold EUAs and track their price performance, net of expenses. The Sponsor, COtwo Advisors LLC, continues to oversee the Trust's operations and adherence to its investment objective.