Learn English – modal verbs ( won’t/ mightn’t … )

Technically, the tense should match, so since we're using the perfect tense (conditional perfect in fact), you should use was.

But both could have ... is and could have ... was are acceptable in this case.

Why? Well, it's because your clause about the paprika being similar to the bell pepper might be true for a long time, and might continue to be true even in the present, so it might be okay to use is.

Maybe not. Maybe the paprika is rotten by now, or already eaten. Then is would make no sense. But a situation continuing to the present would justify use of the present tense is.

Consider:
"I could have gone shopping, because the supermarket was near."
"I could have gone shopping, because the supermarket is near."

If the supermarket has not suddenly moved, it probably still is near – it is now, and it was then – so either one is acceptable.

But some things do not last so long:
Correct: "I could have stayed longer, because it was early in the morning."
Incorrect: "I could have stayed longer, because it is early in the morning."

Unless you are describing something in the very recent past (minutes or hours ago), the fact that it is now early probably has nothing to do with the situation in the first half of that sentence, so mixing the past and present tense in this last example doesn't really work.

According to Grammar for English Language Teachers by Martin Parrott:

We use used to and would as alternatives to the simple past in describing habits and repeated actions which took place over a period of time (and which often then ceased).

When we understand it this way, would is not a modal verb, but is a way to refer to the past.

It is told in the past so why can't we use past continous or past simple? What is the difference in meaning?

We can use past continuous or past simple, but the meaning is different. Compare these:

1. I would forget (I forgot)
2. he would constantly be teaching me (He was constantly teaching me)
3. I would be wanting (I was wanting)

I showed in brackets a similar form, without the word would.

The difference in meaning is that past continuous and past simple don't show us that these things happened repeatedly. (The exception is number 2, which shows that it was repeated by using the word 'constantly'). We use would to emphasise this sense of things happening repeatedly.