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Charcoal production in tropical regions of the world is often perceived to have devastating ecological and environmental effects and governments, public forestry institutions and non government organizations have been particularly concerned about these charcoal-related impacts. The most commonly cited impact is deforestation, i.e., the clearance of forest or woodland. At a small spatial scale this may indeed be the case but on a larger landscape scale charcoal production most frequently results only in forest degradation. Much of the charcoal in tropical countries is commonly made in traditional earth and pit kilns with a wood-to-charcoal conversion rate of about 20% and in 2009 the contribution of charcoal production to deforestation in tropical countries with the highest rates of deforestation is estimated at less than 7%. A large proportion of the area utilized for charcoal production has the potential for rapid forest recovery especially with good post-harvest management. There are conflicting reports on the effects of deforestation on catchment hydrology with the majority of small catchment studies indicating increased runoff and low evapotranspiration while studies of large basins have shown no such changes. Emissions of greenhouse gases from charcoal production in tropical ecosystems in 2009 are estimated at 71.2 million t for carbon dioxide and 1.3 million t for methane. The failure of past charcoal policies to address environmental impacts and achieve sustainability can be attributed to erroneous assumptions and predictions by national and international organizations regarding wood-based fuels. Possible ways of enhancing charcoal policies’ legitimacy and therefore effective implementation are multi-stakeholder participation and demonstration of coherence with globally recognized principles, goals and relevant international regimes, such as the Millennium Development Goals (MDGs). In this way charcoal production can significantly contribute to poverty reduction and environmental sustainability.