A nano-composite of negatively charged carbon nanoparticles (Emperor 2000™), chitosan, and nano-palladium is produced in a one-step hydrothermal process with oxalate reductant. In voltammetric measurements strong pH effects on capacitance and Faradaic current responses are observed due to chitosan forming a shell (or "hydrothermal wrapping") around both carbon nanoparticles and palladium particles in the water-based hydrothermal process. In spite of the wrapping, some Pd-catalytic processes are observed, but with pH controlling the rate. The shell around Pd nanoparticles appears to only allow small molecule reactants such as H2 and O2 but not formic acid or methanol to reach the active catalyst surface. Membrane-transport limited and reaction-type limited catalytic electrochemical responses are observed with high selectivity. Implications of small molecule selectivity and mechanistic selectivity in suppressing cross-over losses in fuel cell technology are discussed.