Hydrothermal carbonization (HTC) has been seen as a potentially beneficial process for converting wet biomass into value-added products. It is, however, necessary to overcome the challenges associated with handling the powdered form of hydrochar—a solid product of the HTC process—by controlling the formation of dust and facilitating smoother transportation and distribution in a potentially wide marketplace. In this paper, the authors investigate the environmental consequences of different alternatives for using hydrochar pellets produced from mixed sludges from pulp and paper mills in Sweden, using the environmental life cycle assessment (E-LCA). Two scenarios for possible end-uses of hydrochar in combined heat and power (CHP) plants as a source of energy (heat and electricity) were assessed. In these scenarios, hydrochar pellets were assumed to be combusted in CHP plants, thereby avoiding the use of combustible solid wastes (Scenario A) and coal (Scenario B), respectively, to recover energy in the form of electricity and heat. The environmental damages to Human Health, Ecosystem Quality, Climate Change, and Resources are evaluated based on 1 tonne of dry sludge as the functional unit. The results from this analysis illustrate that Scenario B, in which hydrochar replaces coal, offers the greatest reduction in all the environmental damage characterizations, except the Resources category. The displacement of energy-based coal due to hydrochar combustion contributed most significantly to the environmental damages wrought by the system—ranging from 52% in Resources to 93% in Ecosystem Quality. Overall, the results highlight that the application of hydrochar pellets for energy recovery to offset waste- and coal-based energy sources has great environmental benefits. The favorability of sludge hydrochar over solid wastes as fuel for CHP plants may be counter-intuitive at first, since HTC is an energy-intensive process, but when accounting for the necessity of dependence on imports of wastes for instance, the hydrochar pellet may well emerge as a good option for CHPs in Sweden.