they removed it because there are fully fledged special stages, plus red volcano can be normally accessed outside of gfz1. there just is no reason to have that easter egg anymore.
No, not quite.
Some background: RedXVI was originally a character that appeared in the Sonic fangame Sonic MADventure, as an "alter ego" of the guy who actually made the game (and went by the same name). Incidentally, RedXVI the actual person also composed most of Mystic Realm's soundtrack, as well as the music that goes with the story in the intro.
Meanwhile, RedXVI the character was first included in SRB2 as an easter egg in Demo 4, where he appeared in CEZ2 and referenced his appearance in MADventure. There's not much more to be said about this secret though, it really just seems to be a secret advertising the creator's fangame?
Anyway, the Red Volcano Zone 1 included in 1.09 through 1.09.4 was at the time only a beta, and RedXVI (returning from Demo 4) of course served as the method to get to said beta level. Also in these versions, an eighth black emerald was added to allow you to turn into "Hyper Sonic", obtained through another elaborate secret involving RedXVI as you already know. (There was also another RedXVI secret allowing you to obtain the "God Menu", which is basically an old name for Pandora's Box.)
In 2.0 however, Red Volcano Zone 1 was no longer a beta nor secret, and there was no more black emerald (or Hyper Sonic), so RedXVI was no longer useful for these two secrets at least. Instead, he was resprited as a pope, and hidden in the then-remade CEZ2, where he sends you to heaven instead of hell. "Heaven" being Neo Aerial Garden Zone, that is.
In 2.1 onwards RedXVI no longer makes a cameo in SRB2. I think part of the reasoning for this was that most people around no longer understood what the character was originally referencing anymore. (As proven here, everyone knows him mostly for the old RVZ1 secret these days.) Even so, there are still a few references to RedXVI left in SRB2 even today. =)
(Most of this is explained in more detail in this page on the wiki, by the way:
https://wiki.srb2.org/wiki/RedXVI)