Why does iCloud storage also use space on my Mac?

It may take a while for files to get all sorted out.

If you use iCloud Photos for pictures rather than iCloud Drive, then you can "Optimize Storage" to keep the originals at iCloud Photos and have screen sized images on the iPhone to make for quick scrolling through pictures. That can save 80% to 90% of the space, so you might be able to get 2TB of pictures in 400 GB of storage.

"Optimize Storage" is also available for iCloud Drive, and that works by keeping a few files local and grabbing others as needed. For scrolling through pictures, that would be very slow. Videos would be excruciatingly slow.

I would expect that on your phone in Files>iCloud Drive, you should see a list of all the files that are in iCloud's iCloud Drive, maybe like this:

The

icon means that this file is in iCloud and not stored on the phone. I had recently viewed the file on the left, so it is still stored locally-- until the space is needed for a different file.

Mossie55 wrote: …So what's the point in paying for iCloud storage, might as well just drag and drop it on to my desktop

That's correct. iCloud Drive is a folder like any other folder on your Mac. For instance, if you see the folder "My Vacation" in iCloud Drive, then you are seeing the "My Vacation" folder on your Mac. Of course, it occupies storage space there.

The only thing different about the iCloud Drive folder is that its contents are copied to a similar iCloud Drive folder in your account at iCloud.com, and then they are copied to the iCloud Drive folder on any other device connected to the account. If you put "My Vacation" in iCloud Drive, you can see and use that folder anywhere.

iCloud Drive is a synchronization service. It keeps the included files on your Mac the same as the files on your iPhone and at iCloud.com. If you are not interested in synchronizing these files with other devices, then iCloud Drive may not be a good choice for you.

You didn't say what version of macOS you are using, but in Sequoia, it is possible to remove files from the Mac and keep them on iCloud. But you're paying for synchronization-- the ability for changes to be quickly transferred to local files on other devices.