Sorry if this sounds stupid but from what I've read dukes are generally high up on the nobility scale, but could they create an earldom? Would a duke rule over a earl or a baron or did they basically have sovereignty in their own domains.
No, they couldn't, because earl is a British title and the giving out of titles of nobility has always been a right of the crown alone in the various states that have occupied the island. Elsewhere in Europe where there were states whose sovereign was a duke, for example in Italy, those dukes could give out the equivalent title of count if they wished as they were sovereigns.