Once you have refunded, the label option is no longer available.
You should not refund until you get the item back.
You will now have to communicate with the buyer to find a way to reimburse them for postage.
You could send them a payment via Paypal, send them a stamped addressed padded envelope, stamps to cover the postage etc.
"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)