Old way: Cast a spell, terrain A is switched to terrain B, tile by tile as defined by the spell. The graphics engine represents this change. For example, a new hill is created by elevating a hill’s height across many land tiles. The area affected is defined by the spell. Another example, a spell start a forest fire, the spell has to tell how the fire is spread tile by tile.
Material physics way: Cast a spell, material contained in the tile is changed/added/removed. Material physics engine then determine the materialistic result of such change. The graphics engine then represents this result. For example, tons of soil is dumped on 1 or more tile. The semi-liquid soil will spread to surrounding according to the physics engine. A new hill will then be formed. How high the hill is depends on how much soil is dumped by the spell. Another example, a Fireball spell is cast to a forest; the material physics engine will know how to handle fire with the material of wood.
While the Material Physics way would definitely be a new twist and maybe pretty cool, it wouldn't just be more complicated to program and run, it would be a bitch to program and run. Asking havoc to simulate a hill's worth of soil being dumped on a tile and spreading out is more than excessive, and the end results probably wouldn't look good. It would make such hills look like mounds of loosely packed dirt (and why couldn't my channeler simply push the ground up from underneath? why does he have to conjure ten-thousand tons of soil from thin air and drop it?). And shooting a fireball at a forest... That's almost as bad. It would have to simulate how fast the fire should spread, and how far - and to do that it would have to take into account distances between trees, and probably more.
And even still, there is as much hard-coding, in a way, going on in the material physics method. After all, something has to be hardcoded to allow for your spell to drop this massive amount of dirt from the sky.
And frankly, your description of the "Old way" is a bit simplistic and not entirely relevant. The terrain in Elemental is not comparable to the terrain in games like Civilization. There each tile is one terrain, be it plains, hills, mountains, etc. In Elemental, hills and mountains don't appear to just span one tile, but rather are contiguous features spanning larger areas, etc. The terrain is actually 3D. This means you can dynamically alter terrain without simulating overkill physics and without hardcoding. You want a spell to make a hill, make a spell that raises elevation of a target area. If you cast said spell in the ocean, your hill will probably be submerged just like in your material physics method but without the enormous programming and run-time excesses. As long as spells are capable of accessing and altering terrain parameters you could mod in any terrain-altering spell that your heart desires. Work would have to be put in by the devs if they want such spells to be animated (trees growing, terrain rising and sinking, formations forming and breaking, etc). But then they'd have to do that in most cases in the material physics method anyways, as the physics engine isn't going to be able to figure out how trees should grow all by itself - especially if it just considers trees and forests to be piles of wood.
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Stardock could put both methods in so people with non-super computers could still run the game, but then things would turn out very differently based on what version you're running and that doesn't sound ideal to me.