Is it possible that the watch noise level warning can recognize if you are wearing Air Pro ear buds with noise reduction active so it realizes that you are not being exposed

AirPods (even AirPods Pro with the Silicone ear tips) are not an approved and certified noise reduction device which would be required in many instances such as under employment regulations. It is also fair to say the Apple Watch is not a calibrated sound level instrument, so it should be considered as informative but not approved for use where noise levels might be harmful. At best it might give you a clue that you should limit noise exposure, or suggest a proper check with a calibrated device is necessary.

The noise cancelling function in AirPods doesn't actually prevent the high sound pressures reaching the wearer. The AirPod simply adds additional sound which is exactly out of phase so it cancels the nuisance sounds like background street or room noise which interfere in regular use like music playing or phone calls. However, it does not have the audio power to cancel very high level sounds which would be damaging to hearing.