That sure is some gradient shading, mah bruvvas. It's like pillowshading viewed from the side ; D
Err, vierbit, actually, I'm digging overkill's edit just a tad bit more, and I'll explain why:
Except for the rocks, which really are a bit too dark, I like how colours intertwine between objects and background. Although the pallette separating way is a good one, in my personal opinion, you can separate elements in a lot of other ways as well. I like how the ground is darker than the sky, this means that the foreground has a broader range of contrast than the background, which is good in my book (although since it's night, things getting darker as they are more far away also works well).
Creating contrast between objects, foreground and background is very important, but there are several ways that work differently with different graphical styles.
Animated vs. Non-animated <- this comes naturally
High-contrast vs. Low-contrast
Bright vs. Dark <- vierbit's edit
Saturated vs. Gray <- vierbit's edit also in some regards
Unique Color vs. General Colors <- vierbit's edit
Color vs. Complementary Colors
Warm vs. Cool coloring
Detail vs. Smoothness.
I just want to point out the different ways to attack this issue. I do not disagree at all with vierbit's edit, it proves a great point and is well concieved, but it's not the only way to go at it! So I thought I'd try to present a larger picture of possibilities : D