Is there like a major policy difference between the two?
This has been discussed at length in every thread on the internet that discusses this race, but yes. Hanabusa is seen as a more pro-business, hawkish, socially moderate Democrat. She only endorsed marriage equality shortly before she began running against Schatz. Schatz is more of the progressive type, more pro-environment, socially liberal, and anti-corporate. Hanabusa opposed EPA regulations while in the Hawaii Senate, and supported FISA and CISPA while Schatz opposed it.
There's also a bit of history here:
When longtime progressive Rep. Patsy Mink died in the fall of 2002, Mink's family asked the Democratic party to clear the path to the nomination for Mink's husband, John Mink. Most obeyed the request, including then-Lt. Gov Mazie Hirono and then-State Rep. Brian Schatz. The only one who defied the request was State Rep. Ed Case, who was then mostly known for leading the fight to reduce union pensions. Case defeated John Mink, and was elected to Congress in 2002, where he joined the Blue Dog Caucus and voted accordingly.
When Ed Case attempted to primary then-Sen. Daniel Akaka in 2006, several candidates stepped up to fill the open 2nd district. Among them were Brian Schatz, Mazie Hirono, and State Sen. Colleen Hanabusa. Schatz and Hirono ran as longtime supporters of Mink, vowing to carry on her legacy, repeatedly calling it "Patsy's Seat". Hanabusa on the other hand, was a longtime ally of Ed Case. She had been elected to the State Senate in 1998, on a platform that included increased defense spending and opposition to same-sex marriage. She was also a major ally of Case's during his fight against unions. Hanabusa made it clear in interviews that she was not running on Mink's legacy, and in fact was a political foe of Mink's when she was alive.
While Schatz made a good effort, it was clear that Mazie Hirono was a better fit to be Mink's successor (They had a long working relationship dating back the the 70's, and Hirono had been endorsed by Mink's daughter). Hirono won the primary, and the seat shortly thereafter.
Hanabusa continued to serve as Senate President until she defeated Charles Djou in the Hawaii 1st District in the 2010 elections. It's worth noting that she was the main obstacle to the passing of both emergency contraceptives and civil unions in the Hawaii Legislature.
