Sometimes you have to set hard limits on what the engine should try to attempt, and what you allow the players to attempt. I would set a limit on how many non-important (gibs) physics objects are allowed to calculate per frame. If a player were to try to abuse it, it would not look correct, possibly slow, and probably not pretty, but at least it will be limited as to how it affects the performance for other players in the world.
The candle solution seems obvious. Radius check for how many other candles are nearby, and only allow so many to be clustered together.
I'm not trying to say this gib thing needs to be done. I'm just saying that it is possible to have a decent gib setup without affecting performance much at all, and without compromising the existing physics. It may not be an obvious or easy solution, but it can be done. I just have a lot of fun playing with gib code personally.