Today, Google Earth allows you to import images to overlay on existing terrain.
Is it possible to import custom terrain to replace default terrain in Google Earth? There doesn't appear to be any options for doing so?
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After you publish a map with a terrain layer, you can view it in the Google Earth Client, which produces a 3D view of the terrain.
The linked instruction page provides information about what file types are currently supported. As this could change over time, I will not list those here.
Note that there are some caveats:
You can also add multiple terrain layers to a map. However, only one terrain layer is active. The last terrain layer shown in the left navigation panel of Google Earth is the active terrain layer. All other layers are ignored.
And yes, this applies to Google Earth's current/default terrain:
If your terrain data covers a limited portion of the earth's surface, the remaining areas will be flat unless you add elevation values for those areas to your terrain layer. In most cases, you're interested only in the area that contains the custom terrain data. However, if you'd like to see realistic elevations for all areas on the globe, you can upload and process global terrain data and include it as part of your layer. Check the web for publicly available terrain data with global coverage.
At the moment I am unable to determine whether a Google Earth Pro account is required to be able to view these custom "Google Map Engine" terrains inside Google Earth. Once I have a chance to try it out myself I will update the post.
Frankly, it would be nice to be able to achieve similar results without having to go through the trouble of using the Google Maps Engine online service. Having to upload terrain data to remote servers is less desirable. I would really like to see an option right inside (just like image overlays) Google Earth for displaying custom terrain.