Butterscotch and caramel share similar ingredient origins, but have different flavor profiles. Both are essentially cooked sugars, but butterscotch uses brown sugar and butter to create a rich, buttery essence, while true caramel is made from just granulated sugar.
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True caramel is just sugar, melted and heated to a temperature of between 320 to 350 degrees Fahrenheit. When fully caramelized, the sugar turns syrupy -- ranging in depth of hue from golden to deep brown. The soft caramel that fills bonbons or tops ice cream may include milk and butter to enhance the texture and add creaminess. Butterscotch involves cooking brown sugar and butter down together, often along with a pinch of salt, a splash of vanilla extract and, sometimes, cream.
No Alcohol in Either
The distinction between caramel and butterscotch does not have to do with their booze content. Butterscotch, despite its name, does not contain alcohol. The name "butterscotch" is thought to have derived as a version of the word "scorched," in reference to the browned butter, or because it was originally made into candies that were scored, or cut.
Brown sugar tends to make butterscotch taste sweeter than caramel. Because it's often cooked longer, caramel can taste a bit burnt. The brown sugar also imparts a molasses-like flavor into butterscotch. Heating the brown sugar and butter together creates a Maillard reaction, which results when sugar and amino acids present in the butter are cooked together. This reaction is what creates butterscotch's deep golden color. It also gives it an unctuous mouthfeel and richer, deeper flavor than you find in caramel.
Butterscotch is more often cooked to a hard stage, because hard butterscotch candies are more common than caramel ones. Caramel also turns from a golden brown drizzling sauce to a hard, burned sugar quickly. Both make excellent dessert sauces when combined with cream. Which you choose depends on the level of sweetness you're after.