Where it comes from
Coal is the shallowest ore: dig near the surface and look for dark sooty stone. It keeps turning up deeper, mixed in with copper. See Finding ore and Mining and mauls.
Burnt wood in a Campfire's ash pit leaves charcoal, which works the same.
What it is for
It goes into torches, feeds the Smelter as fuel and is ground with chitin into black powder at the Powder bench.