To make a world that big fully alterable would have taken 10 disks, tons of memory goes into alteration. When you save a game it is basically a bunch of switches being saved. Did you complete this quest? Yes (switch up) and you completed it evil (switch down) and that made this faction happy (switch up) and that faction mad (switch down). Very very little space. Even decoration is like that, Gnome on floor. Saved as a gnome and a x,y area on the floor. In many games you might notice if you put an object down facing west, when you save and load it faces east.
That being said, the degree of destruction would be thousands of switches saved, and if you say "well I don't care if it is saved or not" then you would be pointing out that you blew a hole in the earth then came back and everything was OK. It also changes game play and clipping and pathing then you fall through the world. Red Faction was known for having destructible environments, but poor aiming, graphics, poor motion of characters, didn't care for the game at all.
But one of the things I have been saying for a while is that there should be interactions with environments like the guy chained in the church or swings that don't swing or shooting chains that don't break. Rocks that fly when by an explosion. Impossible to make everything alterable but obvious things should be without much memory loss, but even some memory loss here means you are giving up memory for something else.
This is why I support the multiple cd's (like FFVII) and devs are so f'ing scared of for some reason. The cd themselves are practically free so they can not use that excuse. And one thing Todd Howard did say a few times is that he wished that they had more memory to play with. Even then one save on the hard drive would become pretty sizable, and that is not an option for the smaller hard drives of the consoles, but could work on the pc if you were willing to have big saves. Which is why for the time being pc games haven't died out, gives more options easier like this.
Also I heard that FFXIII is going to be multiple disks so maybe Square will break the seal for everyone else.
Again sorry for long post but should clear things up.
PS maybe the explosion looks "off the ground" because it is the end of the explosion and the explosion is disappearing from ground up.