Why does my iCloud drive take up space on my Mac's internal hard drive

The default is for it to keep a local copy on your Mac. You can potentially reduce the space required via the Optimize option.

See the following from Add your Desktop and Documents files to iCloud Drive - Apple Support

If you need more space on your device, iCloud Drive can help. On your Mac, choose Apple menu  > System Preferences. Click Apple ID, then click iCloud. On macOS Mojave or earlier, choose Apple menu  > System Preferences, then click iCloud. Turn on Optimize Mac Storage. Then your Mac keeps all of your recent files on your computer, but keeps your older ones only in iCloud, ready for you to download when you need them again. If you want to free up more space on your Mac, follow these steps. On your iPhone, iPad, or iPod touch, you can search and browse files from all of your devices and download them only as you need them.