Charcoal is a very efficient method of fuel for smelting. It is made by smelting Wood in a furnace. Charcoal acts and looks exactly like coal, and likewise can also be used to make torches and power minecarts. Charcoal and coal cannot stack with each other and neither can be changed with a texture pack. Charcoal is the best choice if you can not find coal anywhere near you, which is rare but possible.
Charcoal can be created by burning/smelting using wood as the ingredient in a furnace.