The chisel is a tool to carve messages in a method, similar to writing signs. It was added in Public Beta 30.
When you right click on a stone- or wood-block, you are able to edit a close-up of the block, similar to sign-writing. Each carving costs one of your chisel's initial 100 durability.
Like vanilla signs, the carving occupies the space in front of the block, where it's fixed to. Therefore, you can't place anything else there.
There is also a second variant, the moon-chisel, which writes in glowing letters that only show up at night, if you are near it. The max distance from which it can be seen is about nine blocks.
The block's surface can be cleared, by just left-clicking with anything except for a chisel.