Screen Space Ambient Occlusion (SSAO)
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Ambient Occlusion (AO) is a type of lighting technique applied in-game to create more realistic lighting. AO simulates soft shadows created by two surfaces that are close together. Ambient occlusion in games is normally accomplished through Screen Space Ambient Occlusion, which is a simplified way to fake realistic AO with shaders in a process fast enough for real-time rendering. SSAO is a DirectX 9.0c shader, so it will only be available on fairly modern video cards.
SSAO works by examining an onscreen pixel, and then comparing its location in the depth buffer (i.e. how far it is away from the player) to the pixels around it. Pixels which are close together but not coplanar (on the same face) are shaded to simulate soft shadows. To maintain playable framerates, it is not possible to sample every pixel every frame, so random sampling is used, which will inevitably create noise/grain which may be more noticable when the player moves around.
SSAO causes several rendering bugs which are common to nearly all games which offer SSAO.
Enabling ambient occlusion
Ambient occlusion cannot be controlled through the video options within a Source game. AO is controlled by video drivers. For NVidia users, this is found in the NVidia Control Panel. ATI Catalyst Control Center does not appear to have an ambient occlusion option and it may not be possible to turn on AO with an ATI card.