Caramel and butterscotch are conceptually similar sweets with similar cooking processes. The results are different because caramel uses white sugar, while butterscotch uses brown.
Both caramel and butterscotch are made by heating sugar slowly over time, causing it to break down and form new compounds as it turns brown and liquefies.
The brown sugar, brought on by the addition of molasses during the refining process, winds up giving butterscotch a much deeper flavor than you'd get from caramel.
Butterscotch also has butter and cream added to the process, creating an even fattier, more decadent sauce with a richness you can't quite get with simple, white sugar.
Since they're so similar in concept, you can still use caramel and butterscotch interchangeably. It's all about which you'd prefer in any given situation.