> Is it just “lost” or is it physically destroyed (which would seem impossible)?
No, the energy isn’t lost. It *contributes* to the expansion of the Universe. Note I stressed the word contributes. The Universe’s expansion has a primary cause, but there are certain things that contribute to it. This is the currently accepted answer by science.
What seems to be getting overlooked in this discussion is that Einstein’s laws only apply to a static, non-expanding Universe. This is fine at most scales, because the expansion of the Universe contributes a trivial amount of error at local scales. Beyond those scales, the error from the expansion of the Universe adds up and it has to be accounted for in order for the results to be accurate. That’s the case with redshifting.
So the answer to your question is that the energy isn’t lost/destroyed, it’s still conserved. The equations we use most often simply don’t account for where it goes, because they assume a static, non-expanding Universe. You have to start using more accurate approximations to understand what happens to the energy at that scale.
This is discussed by the astrophysicist Ethan Siegel in this article. It’s not quite ELI5, but it will hopefully give you a starting point where you can study this further.
https://www.forbes.com/sites/startswithabang/2015/12/19/ask-ethan-when-a-photon-gets-redshifted-where-does-the-energy-go
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