iCloud stores your files in the cloud, but it also keeps a copy on your Mac of every file you've opened, and all of them if Optimize Mac Storage is off. Photos does the same with full-size originals. Paying for iCloud gives you room online, not on the Mac.
Free the space without deleting anything
iCloud Drive: open System Settings → your name → iCloud → Drive and turn on Optimize Mac Storage. macOS removes local copies of files you haven't used recently.
One folder right now: in Finder, right-click a folder in iCloud Drive and choose Remove Download. The file stays in iCloud and on your other devices.
Photos: open Photos → Settings → iCloud and choose Optimize Mac Storage. Full-size originals stay in iCloud.
Never delete files from the iCloud Drive folder to save space. Deleting there deletes them from iCloud and every device. Use Remove Download instead.