California's Proposition 65 lists a whole lot of different substances that may be carcinogenic, and yes wood dust is one of them. But basically, the law says that anything containing any of those substances must have that warning label on the package if it's going to be sold in the state of California. Period.
The only way to not have that label is if there is a 1 in 100,000 or less chance of getting cancer from that product over 70 years of exposure. But the law doesn't say how to test for that, doesn't require the actual risk to be on the label, or how to reduce exposure.
I personally don't think C&C is dusty enough to be a problem. All paper products are going to be a bit dusty, by nature, but few are really an issue. However, if you're uncomfortable with the label, why not write a letter to the Kaytee company and ask why the label is there, and what the risks are? As long as it is a polite letter, there's no harm in asking - in fact you may get some really interesting information!