Am I trying to use a variable or pass a value by reference or by value?

Downwardflight:
[...]
led.target()
So what does led denote? Is it referring to ledpin in the line
const byte ledPin=13; ?

No, pwmpin is assigned to the led object when it is created:

Fade led(pwmPin, 100); // 100 is the interval between changes to PWM output