Image Based Lighting basically puts a sphere around your entire scene with an image wrapped on it.  Instead of the sun providing light, the light comes from the image (more from bright areas).  You can also choose to have the image as the background for your scene.

Basically, what it does is provide realistic lighting and shadows, as well as giving reflective objects something to reflect.  You can simply use one of the many free HDRI images available on the net (link in the header for some), or you can roll your own - from photos or a bryce render.

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Ignore the shooty dog thing.