Notes:

Judging by the tags you probably can guess what my theory is.
The location Wally is in is likely one of those two zones, and/or possibly an amalgamation of both of them.

To those not in the know, Sonic 2 featured a cut level called the "Hidden Palace Zone". The zone was later officially used in Sonic & Knuckles. But in 2013 re-release of Sonic 2, they added HPZ back in and you'd get to it via Mystic Cave Zone. Most striking about this zone is a giant emerald that looks exactly like the Master Emerald, which wouldn't appear until Sonic 3. If they're gonna change this unusual, but ultimately insignificant stage feature into a major plot point, all I can say is: "Ian you f------ genius."