It's an emulator package, but with hooks for modification.
So with an old game inside Carbon, they can add FMV/still cutscenes and new music to the River City Girls Zero port of Shin Nekketsu Kōha: Kunio-tachi no Banka, or it can (I assume, by the trailer) replace the FMV of Tomba with an upscaled version, or it could allow Trophy/Achievement unlocks, etc.
It runs the game, but then also has the engine on top of it to interrupt or replace aspects of the game on demand. (Limited Run is saying they want "carbon copy" releases accurate to the originals, but given that they're aready modifying the games for localization/modernization, hopefully they're not too opposed to
options such as retouched assets or speed stabilization hacks or maybe widescreen hacks where applicable... and ideally they'd treat them as "options", so you could play the original version or turn on the hacked alternative version in the same release.)
These things aren't unfamiliar in ROM hacking communities (and Digital Eclipse has done some of these things too,) but it's a step above what's typically done in emulated console releases.
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