CharacterEncoding is an option for input and output functions which specifies what raw character encoding should be used.
The default is CharacterEncoding:>$CharacterEncoding.
The possible settings for CharacterEncoding are the same as for $CharacterEncoding.
See The Mathematica Book: Section 2.7.8 and Section 2.11.3.
See also: ToCharacterCode, FromCharacterCode, StringReplace, $SystemCharacterEncoding, ShowSpecialCharacters.