After retiring as a player after the 1992–93 season, Karlsson took a coaching position with Mörrum. In 1995 he returned to Frölunda to work as a coach and manager of their youth department. He became an assistant coach for Frölunda together with Christer Kellgren under head coach Tommy Boustedt during the 1999–00 season. The following season Karlsson was the lone assistant coach to Boustedt, and he continued as assistant coach when Conny Evensson took over as head coach prior to the 2002–03 season. Together they led Frölunda to win the 2003 Swedish Championship against Färjestads BK, winning the best-of-seven finals in four games.
The following season Evensson was forced to retire due to illness and Karlsson took over as interim head coach for the rest of the season. Karlsson returned to his position as assistant coach when Stephan Lundh was hired as head coach prior to the 2004–05 season. They led Frölunda to one of the best season performances in Swedish ice hockey, culminating with the 2005 Swedish Championship finals which they won against Färjestads BK four to one in games. Lundh and Karlsson coached Frölunda to their second straight finals appearance, once again against Färjestad, this time losing two to four in games.
Karlsson, still hired by Frölunda, took a leave of absence prior to the 2006–07 season and signed a contract with Linköpings HC as assistant coach to Gunnar Persson. Persson was fired in January 2007 and Karlsson took over the job as head coach, he led Linköping to the Swedish Championship finals where they lost two games to four against Modo Hockey. The following season Karlsson led Linköping to their second straight finals appearance, where they lost to HV71 two games to four. Karlsson returned to Frölunda prior to the 2008–09 season as assistant coach to Ulf Dahlén.
Prior to the 2009–10 season Karlsson was named the head coach of HV71 of the Elitserien. He became Swedish champions in his first season with the team, winning the regulation series, reaching and winning the finals. However, the following season, the team performed worse; although the team won the regulation series for a second consecutive year, the team surprisingly were eliminated by Elitserien newcomers AIK already in the quarter-finals, losing 4–0 in games.
After the 2010–11 season, Karlsson left HV71 and signed as assistant coach to Bengt-Åke Gustafsson in the Atlant Moscow Oblast of the Kontinental Hockey League (KHL). After a disappointing start of the 2011–12 season for Moscow Oblast, Karlsson took over the head-coaching job for the team as Gustafsson was forced to leave the club. Karlsson was fired from Atlant on 20 October 2012. He took over the head coach job of Rögle BK on 12 January 2013, as the team were last placed in the standings.
In June 2013 he was named new head coach of the Denmark’s national icehockey team.