At my house, I use paper towels. Maybe this is a crutch to get me to cook more by reducing the clean-up overhead. I just don't worry about the environmental impact, but I do choose towels made of recycled material.
The difference between a stinky, overused sponge, or having to wash cloth napkins and towels (environmental impact / water / energy usage?) is that I actually cook, and have fun in the kitchen.