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The ICESat-2 ATL08 land and vegetation product includes several flags that can be used for the assessment of LiDAR-environment interactions and can help select data of the highest quality. However, the usability of these flags has not been sufficiently studied to date. Here, we aimed to evaluate the effects of atmospheric scattering, the presence of snow, canopy cover, terrain slope, beam strength, and solar angle on the accuracy of terrain and canopy height of the ATL08 product as well as on providing recommendations on how to filter data in order to minimize errors. We evaluated the vertical accuracy of ATL08 terrain and canopy height in European mountains by comparing them with the digital terrain model and canopy height model derived from airborne laser scanning data. Our results indicate that the assessment of atmospheric effects using the cloud confidence flag (cloud_­ flag_atm; i.e. number of cloud layers) is better than the previously used multiple scattering warning flag (msw_flag). Day acquisitions with more than one layer of clouds yielded a terrain elevation RMSE of 3.22 m in forests while night acquisitions with no more than a single layer of clouds resulted in RMSE of 1.73 m. The increasing atmospheric scattering effects increased the photons’ path length, resulting in terrain height under­ estimation. The presence of snow had a strong positive effect on the number of identified ground photons, independently of the canopy cover, but resulted in an overestimation of terrain height in higher altitudes. Accordingly, the presence of snow cover resulted in a significant underestimation of canopy height in forests. The canopy height in broadleaf/mixed as well as coniferous forests was in summer underestimated on average by 2.1 m (%ME of − 15.3%) and 1.2 m (%ME of − 8.2%), respectively; in winter, however, the underestimation increased to 8.5 m (%ME of − 56.8%) and 5.7 m (%ME of − 38.3%), respectively. Canopy height estimates had better accuracy for the strong beam (RMSE of 5.09 m; %RMSE of 35.4%) than for the weak beam (RMSE of 7.03 m; %RMSE of 51.3%). Our results show that the ATL08 terrain height accuracy decreases with uneven distri­ bution of signal photons within individual segments and further deteriorates with increasing terrain slope. Filtering out segments with poor distribution of photons, more than one layer of clouds during the day, and snow cover in high altitudes is the best approach for minimizing the error while maximizing the number of segments left for subsequent analysis.