To be fair, the teacher has a stack of assignments which is probably put in and transported around in a pile. Something on the wrong paper size will be a major PITA. (I prefer this theory over the teacher feeding them into a scanner so that someone in India can do the grading, but that theory would also make paper size important.)
Life is full of incredibly arbitrary criteria that actually make sense in terms of someone else's workflow. You don't know that workflow, you're just given rules to follow. It is best to follow those rules, no matter how stupid they are.
I could see the teacher giving a warning that the next time it should be the correct size, rather than a zero-tolerance paper size policy, especially when the child put forth so much effort on the homework. Teachers are supposed to encourage learning and interest in the material.
I realize that sometimes we just have to follow arbitrary rules, but the attitude of, "keeping one's head down," is not how change happens.
Do you know that said warning had not been already given and this wasn't "next time"?
Do you know that the teacher had not clearly stated to the class what the penalties would be for the wrong paper size?
In either case I can see the teacher acting as described. And wouldn't fault the teacher for doing so. If, indeed, the teacher was enforcing an arbitrary rule which had not been clearly communicated, then I would fault the teacher. But I suspect this was not the case. The rule was present and the kid was supposed to know it, but forgot.
Life is full of incredibly arbitrary criteria that actually make sense in terms of someone else's workflow. You don't know that workflow, you're just given rules to follow. It is best to follow those rules, no matter how stupid they are.