Charcoal is an alternative to coal. Smelting Wood (Logs) in a furnace creates charcoal, which can be used for everything coal can (e.g., crafting items, powering minecarts, and smelting objects) except it cannot be made into Coal Dust and thus cannot be used to make carbon plates or anything that comes from coal dust (Because of this, you should always try to craft torches from charcoal instead of coal, or you will be wasting an important material!). Charcoal makes it easier for players to survive their first night as it allows them to craft torches much more easily. Charcoal does not stack with coal, though the two look identical and cannot be differentiated with a texture pack, as they share the same texture file (although as of snapshot.13w19a, a snapshot of the 1.6 update, Charcoal has a different texture to Coal).
Charcoal may be preferable in some circumstances because it can be used directly in a Blast Furnace, while coal must be turned into Coal Coke before it can be used.
While charcoal or coal has long been the prefered fuel for furnaces or generators, scaffold has proven to be a far superior fuel in every way, being more than TWICE as efficient. As such, players should try their best to only use charcoal for torches.