Doing explicitly offensive things as satire and being selectively quoted aren't similar.
Who gets to decide what is and isn't offensive and to what degree?
Because they are offensive
> and why should someone be legally punished for it
Because that is what legal systems are for. Punishing people who do things we, as a society, find objectionable
> Who gets to decide what is and isn't offensive and to what degree?
That is a rather general question, but generally speaking, the law makers and the legal system decide things like that.
Now, mind you, personally, I support a rather radical version of freedom of expression. I think almost every kind of censorship is ultimately detrimental to society, but I am not naive enough to ask "but who gets to decide" or "but why cannot I"
The original video started with him saying something like "my girlfriend thinks her pug is the cutest thing in the world, so I'm going to turn it into the worst thing I can think of".
Not so extreme considering this kind of editing is basically what led to Count Dankula's court case and conviction.