In the General Preface to the so-called Wessex Edition of his complete works, published in 1912. Said preface is reproduced here and begins as follows (emphasis mine):
In accepting a proposal for a definitive edition of these productions in prose and verse I have found an opportunity of classifying the novels under heads that show approximately the author’s aim, if not his achievement, in each book of the series at the date of its composition. Sometimes the aim was lower than at other times; sometimes, where the intention was primarily high, force of circumstances (among which the chief were the necessities of magazine publication) compelled a modification, great or slight, of the original plan. Of a few, however, of the longer novels, and of many of the shorter tales, it may be assumed that they stand to-day much as they would have stood if no accidents had obstructed the channel between the writer and the public. That many of them, if any, stand as they would stand if written now is not to be supposed[.]
In the classification of these fictitious chronicles—for which the name of ‘The Wessex Novels’ was adopted, and is still retained—the first group is called ‘Novels of Character and Environment,’ and contains those which approach most nearly to uninfluenced works; also one or two which, whatever their quality in some few of their episodes, may claim a verisimilitude in general treatment and detail.
The second group is distinguished as ‘Romances and Fantasies,’ a sufficiently descriptive definition. The third class—‘Novels of Ingenuity’—show a not infrequent disregard of the probable in the chain of events, and depend for their interest mainly on the incidents themselves. They might also be characterized as ‘Experiments,’ and were written for the nonce simply; though despite the artificiality of their fable some of their scenes are not without fidelity to life.
It will not be supposed that these differences are distinctly perceptible in every page of every volume. It was inevitable that blendings and alternations should occur in all. Moreover, as it was not thought desirable in every instance to change the arrangement of the shorter stories to which readers have grown accustomed, certain of these may be found under headings to which an acute judgment might deny appropriateness.
Hat-tip to Linda Joyce Baker whose 1969 master's thesis ""Novels of Character and Environment": a Study of the Works of Thomas Hardy" from Kansas State Teachers College showed me where to look:
Hardy's phrase "Novels of Character and Environment," which he first used in the General Preface to the Wessex Edition (1912) of his novels.
