Business Description

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 (the “Trust Agreement”) dated November 27, 2023 between COtwo Advisors LLC (the “Sponsor”) and Wilmington Trust, National Association (the “Trustee”). The Trust will issue common units of beneficial interest, or “Shares,” which represent units of fractional undivided beneficial interest in the Trust’s net assets. The Trust’s assets will consist of EU Carbon Emission Allowances for stationary installations (“EUAs”), the unit of account within the European Union Emissions Trading System (“EU ETS”), 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 a management fee to the Sponsor (the “Sponsor’s Management Fee”), other Trust expenses and liabilities not assumed by the Sponsor. The Trust will not hold any assets other than EUAs and cash. The EUAs will be held at the European Union Registry (the “Union Registry”). Shares are issued by the Trust only in blocks of 50,000 Shares called “Baskets” in exchange for 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 State Street Bank and Trust Company (the “Transfer Agent”). Individual Shares will not be redeemed by the Trust, but are listed for trading on NYSE Arca, Inc. (the “Exchange”) under the symbol “CTWO.” Shareholders will take no part in the management or control of the Trust and will have no voting rights with respect to the Trust, except as expressly provided for in the Trust Agreement. The Trust is not a registered investment company under the Investment Company Act of 1940, as amended (“1940 Act”), and is not required to register with the Securities and Exchange Commission thereunder (the “SEC”). The Trust is not a commodity pool for purposes of the Commodity Exchange Act of 1936, as amended, and the Trust and the Sponsor are not subject to regulation by the Commodity Futures Trading Commission as a commodity pool operator or a commodity trading advisor. State Street Bank and Trust Company serves as the Trust’s Transfer Agent, administrator (the “Administrator”) and cash custodian (the “Cash Custodian”). Foreside Fund Services, LLC serves as the Trust’s marketing agent (the “Marketing Agent”). 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. The Trust will invest in EUAs on a non-discretionary basis ( i.e. , without regard to whether the value of EUAs is rising or falling over any particular period). As a result, the Trust will not attempt to speculatively sell EUAs at times when its price is high or speculatively acquire EUAs at low prices in the expectation of future price increases, nor will the Trust attempt to avoid losses or hedge exposure arising from the risk of changes in the price of EUAs. EUAS and the EUA Industry The following is a more complete description of EUAs, including, without limitation, information about the history of EUAs, the EU ETS, and the global carbon credit market. 1 Description of EU Emissions Trading Scheme Background of EU Emissions Trading Scheme The EU ETS is a “cap and trade” system. It caps the total volume of Green House Gas (“GHG”) emissions from installations and aircraft operators responsible for around 40% of European Union (“EU”) GHG emissions. While the cap was previously set “bottom-up” from the relevant national allocation plans, since 2013 it has been set centrally by the EU which applies EU-wide. The EU ETS is administered by the European Commission, the executive branch of the EU, which issues a predefined amount of emission allowances through auctions or free allocation. Every year, this amount decreases slightly, with the objective that emissions are forced to reduce over time.…