You used Ebay Simple Delivery - where the buyer pays postage to Ebay and they supply you with a label.
Items sent using SD are covered for loss, or damage in transit and Ebay foot the bill.
So, you should have an email saying something like 'the buyer has been fully refunded and told to keep the item but this won't have any impact on you.' Check the wording on the email - it should not imply that you are responsible for the refund.
The money from the buyer for the item will be paid to you although you may have to wait a few days,
"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)