Steve/Julio:
Will wrapping the work in the .002 Stainless Steel foil that Brownell's sells work in place of the charcoal?
Craig
Craig,
Yes. wrapping in stainless foil is the classic toolmaker way of heat treating while preventing scale. The thing that is left out of your post is that newspaper is wrapped around the part first then the foil. The newspaper will burn the oxygen out of the foiled envelope and prevent oxidation from forming on the part. The issue with foiling is to get it airtight.
Whoever asked about using lime, yes it can also be used. It simply provides a barrier to oxygen contacting the part while it's heated. The use of charcoal powder accomplishes at least three things I can think of. First it provides a barrier to O2, second it has a combustible to consume the O2, third it has the potential to provide additional carbon into the surface which will ensure hardening during the casehardening process later.