Rare earth (RE)-doped nanostructures are advanced functional materials with exceptional optical, electronic, and catalytic properties arising from their unique 4f orbital configurations. At the nanoscale, RE ion incorporation into host matrices tunes band structures, defect states, and light–matter interactions, driving innovations in energy harvesting and environmental sensing. Computational modelling plays a vital role in understanding these phenomena and guiding material design. Methods such as density functional theory, time-dependent density functional theory, molecular dynamics, Monte Carlo simulations, and finite-difference time-domain techniques offer multiscale insights into dopant incorporation, defect chemistry, charge transfer, and optical transitions. The theoretical foundations and computational strategies employed to investigate RE-doped nanostructures, emphasizing their applications in photovoltaics, photocatalysis, thermoelectrics, gas and pollutant sensing, and bio/chemical detection are reviewed. Case studies demonstrate how simulations complement experiments by predicting luminescence modulation, adsorption energetics, and spectral conversion. This chapter underscores the pivotal role of computational modelling as both an explanatory and predictive tool, accelerating the development of next-generation RE-doped nanomaterials for sustainable energy and environmental technologies.