Carbon is fine internally and on places that offer no structual value, or on areas that aren't going to be shot.
Carbon is not good as most of your ship. Since shield penetration means a small amount of damage will go through shields, which will be enough to shred a weak material like Carbon. It takes a fair number of shield penetrating hits to go through Steel though.

Xenosteel is also not the ultimate hull block either. It has the best mass:hp ratio, but is functionally weaker than combat steel in raw hp. It adds significantly more hp to your shield than other armor blocks though.

Realistically, only the parts of your ship that are going to take heavy fire need to be Combat Steel. Hardened Steel and even just Steel are fine for places that aren't likely to or won't be hit. Even carbon is fine for small decorative details and internal work.

Thank you for taking the time to clarify. I hope other benefit from this thread. And TY for all your efforts making such a fine Scenario.

Update: I have done some testing with the various blocks on the nose and rear of my ship, areas which regularly takes damage. Interestingly enough, In many battles, I have not lost a single carbon block. While shields are up, the carbon and steel do ok. The amount of damage filtering through the shields must not be enough to melt away the carbon as I feared. That said, once shields go down, it would certainly melt away. Bottom line: Damage filtering through shields is not as bad as I thought it might be.

A question about Xenosteel blocks - is there a reason to use them at all? They seem to be so nerfed with their vulnerability to laser fire. It would be interesting if they would be able to slowly regenerate their hitpoints. I mean, it's a Bio-armor after all.

Self-repair isn't possible.
Xenosteel have the best hp:mass ratio and each block increases your shield capacity by a fair amount. They're susceptible to lasers, but have added resistance against Railguns, Plasma and Legacy Disruptors, which all do bonus damage against metal hull blocks.

@Burrbrusk I am about to use a Soul Syphon all Xeno ship. I will let you know how it works out. I may have to coat some areas with Combat Steel to get the best of both types. My double walled starter ship was doing well with a mix of various steel/hardened/combat. I need to experiment with Xeno now. Took a long while to collect the Xeno for Soul Syphon, I hope it pays off.