Lime is a mineral. It can be produced by burning oyster shells. While under siege by the French, Americna Privateer captain, Cornelius Killick, whose life Sharpe had saved, told Sharpe to burn the oyster shells in storage.
Asking William Frederickson the outcome of this, he was told him it produced quicklime. Sharpe understood, confirming with him that lime blinded on contact. Frederickson said that it did.
With the removal of the entire naval and American element from the movie adaptions, it fell to a newly created character, Catherine, to inform Sharpe of the stored oyster shells.