Simple explanation: Alternate Reality. It's enough like earth in Cave story for us to rule out the absurdly improbable theory that there is another planet with water, green grass, and humanoid lifeforms that look exactly like us. But the bizarre twists in physics and the uncanny ability to perform magic show that it really can't be anywhere in out plain or reality because frankly, stuff like that doesn't happen. But, if you think about it being a parallel universe, it would make perfect sense: same general time and place, just altered physics and slightly changed chronology of the planet that somehow leads to a floating island full of aliens to "land" somewhere on the planet's surface. It's just like Final Fantasy, only with better protagonists and guns that don't suck.