I believe I have a bad/burnt one in this board. If you look at the one to the right you'll see it's blackened.
What you have there is most likely an IR diodes and a phototransistor. The phototransistor detects the light bouncing back from the paper.
Quite often you will find that the epoxy surrounding photodiodes is coloured. This is typically done to help shield them from light of the wrong colour that they may have some residual sensitivity to.
The one which appears blackened may be that way by design. I've never seen a LED "blacken" due to failure.
The fault you have is unlikely due to a failure in a LED or photodiode.
The possible explanations include things like:
1) You're using really IR reflective paper and it gets sensed even though it's nowhere near the top of the bin.
2) There is some IR light leaking into the bin confusing the sensor (have you replaced the bin with something else?)
3) There is something wrong with the sensor circuit.
As a step in diagnosing this, you could place something opaque (and opaque at IR) over both devices (the LED and the phototransistor). This should stop the device from seeing anything and therefore it should not alarm. If this does stop the problem, then your problem is something like 1 or 2 above. If it does not, then either the shredder has a way of checking for these being blocked or it's something like 3 above.