Conversion of biomass into biofuel and biochar with a subsequent soil storage is assumed as a prospective strategy of reducing atmospheric CO2 concentrations. However, substantial uncertainties exist in this field regarding the country-level potential of biochar carbon sequestration, indirect effects of biochar implementation on overall environment, and dominating factors. This study conducted a life cycle assessment of country-wide incorporation of biochar in agriculture, and associated potential benefits. Results showed that over 920 kg CO2e (CO2-equivalent) could be sequestrated via converting 1 t of crop residues into biochar. As an example, based on crop residues availability statistics for China in 2014, the estimated annual carbon sequestration potential could be as high as 0.50 Pg CO2e (1 Pg = 1 × 109 t). The most significant potential for biochar carbon sequestration was identified in the central south, east and northeast of China, which contributed 65% of the national biochar carbon sequestration potential. The biochar system could also contribute to mitigation of the following environmental problems: marine aquatic biodiversity destruction, surface soil and water acidification, etc. Sensitivity analysis demonstrated that biochar yield, carbon content in biochar, electricity conversion efficiencies of bio-oil and pyrolysis gas were the critical parameters determining the biochar system’s overall carbon sequestration potential and environmental effects. This study provides guidance on evaluating biochar’s potential carbon sequestration capacity and comprehensive environmental impacts, as well as research and development needs.