You're right, that would be the worst interpretation. And the most plausible one, if they were indeed fully guilty.
The wicker men were probably real, but it doesn't appear that that represented common druidism. We have to remember that much of what we know about druids comes from Caesar, who had a vested interest in painting them in a negative light.
Human sacrifice occured occasionally in most pagan religions, including the Germanic ones, as evidenced by the bog men, and Graeco-Roman, although it had largely disappeared by the imperial period, having been outlawed under the Republic (though that doesn't necessarily mean that it never occured after that). The story of Iphegenia is a relic of its having existed in Greek religion. In the better sort of pagainsm, it was a very rare thing, a response to great crisis and danger. In the worse sort, such as Carthage and Canaan, or the Aztecs, it was a regular practice. The evidence points toward druidism being among the former. And if James Frazier is correct, all of them (not including the Aztecs) go back to the whole Golden Bough, dying god, corn king thing, a kind of proto-pan-paganism common to the West and Near East.
There's also, in the Old Testament, the story of Abraham and Isaac, which was only stopped at the last moment by an angel, and Jepthah, who vowed to sacrifice the first thing he saw when he came home to God, and his daughter came out the door to greet him. Some Rabbinical commentators think that "devote" here doesn't mean ritual killing, but that she dedicated her life to God and never married, but who knows. And let's not forget that the Christian religion is entirely one Great Act of not only human but Divine sacrifice, and that every day in churches all over medieval Europe, that sacrifice is repeated: since Catholic doctrine is that at the moment of Consecration by the priest, he is literally participating in the death of Christ, and then he and all the worshipers eat Jesus's actual flesh and drink His actual blood. Which takes us back to the dying god, or in this case dying God thing.
There are even reasons not to see druidism as necessarily pagan in the perjorative sense. There are stories such as the druids having seen signs in the heavens around the time of the Nativity, and more or less correctly interpreting them. Similar to how some Church Fathers and theologians credit Virgil with having prophesied Christ's birth. There's a whole school of Christian thought, called prisca theologia, which says that there were traces of The Truth all over the world, in pre-Christian religions, which foreshadowed it all. The monotheism of Zoroaster and Hermes Trismegistus are examples, and one of the reasons which what we call now "occultism" was not really all that frowned upon in the middle ages, as opposed to necromancy and what came to be called, unfortunately "witchcraft," by which they actually meant diabolism.
Anyway, back to the point: the narrative has always been that Diedne was "the remnants of the druids". However, if human sacrifice was The Mystery of Diedne, even the inner mystery, then they wouldn't represent the remnants of the druids in general, but a druidic sect..."shadow druids," to use a D&Dism. And especially, since we're talking about the 8th century here, druidic paganism itself would have been rare, as all the Celtic cultures had been Christian for four or five hundred years, and a cult of dark human sacrificers would have been exceedingly rare, small, and necessarily secretive. Especially since the wicker man ritual is much harder to perform in secret than say, stabbing a victim on an altar.
But that presumes that they were, in fact, guilty.
Yeah, that's the real problem. A breech of the Code, and since technically the only punishment for a breech is death.... But legal and illegal and right and wrong are two different things. The Albigensian Crusade was technically legal, under the law at the time--but was it right? The prosecution of the Templars likewise. Or a thousand more examples, from the execution of thousands of witches whose names we don't know, to the trial of Jeanne d'Arc, to the Crucifixion itself. All legal, at the times of their occurence.
A more sensible and humane course would have been to use diplomacy and negotiation to try and get Diedne to cooperate, rather than immediately resorting to genocide. Even with the Cathars, they tried for quite a long time to use other methods of persuasion before calling the crusade. Tremere's haste looks like guilt and an agenda to me.
I assume that most here are familiar with this? https://www.mymegaverse.org/nexx/Ars/diedne2.html
As I understand it, this is a revision of an article which had first appeared in Sub Rosa. This is pretty much exactly the way I see the thing. And what I use as the true story, in my version of Mythic Europe.
Yes, the characters do have access to it as you say. But we, the players, do not. I guess what I'm really advocating is that the house, the mystery, and the magic be written up in books, so that we can use it in our games if we want to.