Everything is possible.
Compile your own kernel, compile your own (overlay) modules, re-write all mklivecd scripts for this purpose.
I don't know how to do this.
And it has nothing to do with your ext2 question :-)
QUOTE
It is possible to change the mklivecd script to create a livecd.sqfs file that contains e.g. an ext2 instead of a union file system
livecd.sqfs does not contain any unionfs filesystem.