If you decline, they still won't come and collect it as they don't want it.
Then, they will be able to open an 'item not received' case (even for a collection item).
So, the best solution all round is for you to accept their cancellation, refund them and relist the item.
"There are two ways to be fooled. One is to believe what isn't true; the other is to refuse to believe what is true.”
Søren Kierkegaard, Danish philosopher (1813 - 1855)