Paper based pellets are fine. I also used recycled paper - though it is compressed into hard paper, but there is also this stuff here called carefresh, and it's softer.
Paper based pellets are great, though the softer stuff may not soak up the odor as well. You will find out if the product you bought does okay with that.
It is usually not a problem at all for bunnies, unless Dougal decides to really consume it like dinner. Otherwise, it's fine for him to nibble on and eat small amounts.
How's it working so far?