Where does the energy vanish to when light is red shifted

It seems to me that if you stop thinking about light as just photons, and start thinking about light as an EM wave where photons can only be talked about during the interaction of the wave with matter, there is not really a problem. Expansion stretches out the wave as it travels, and every doubling in size of the universe causes the wavelength to double. Where has the energy gone?

One view is that a photon does not change it's characteristics as it moves through space-time anymore than an electron changes it charge as it does so. A photon [or light wave] is emitted at a color [that is, an energy,frequency] and stays that way.

The alternative view is the one Chronos posted "...expansion dilutes energy". That also seems to be a realistic answer since the universe has cooled via CMBR observations from when it was emitted [close to 3000 K] to that which we observe today [about 2.73K].

Can't we state that at any local point of observation where the observer's inertial frame is that of the source, the observed wavelength at any such local point of observation anywhere in the universe would be that of the source of propagation?

...so it is not possible to say that we are in the same inertial frame if we use a space ship to reach the velocity where the CMBR frequency is the frequency it was first emitted?

CMBR was first emitted at speed c; it has spend 13.7B years or so reaching us, all the time at c; it remains at see for the entire future;p tomorrows CMBR will also be traveling at c.

The CMBR was created by inflationary expansion and was not emitted by atoms; atoms had not formed at 380,000 years after the big bang when the CMBR appeared.

Actually the CMBR was created during recombination when the universe cooled far enough for electrons and nuclei to combine.

Cosmic background radiation is well explained as radiation left over from an early stage in the development of the universe, and its discovery is considered a landmark test of the Big Bang model of the universe. When the universe was young, before the formation of stars and planets, it was denser, much hotter, and filled with a uniform glow from a white-hot fog of hydrogen plasma. As the universe expanded, both the plasma and the radiation filling it grew cooler. When the universe cooled enough, protons and electrons combined to form neutral atoms. These atoms could no longer absorb the thermal radiation, and so the universe became transparent instead of being an opaque fog. Cosmologists refer to the time period when neutral atoms first formed as the recombination epoch, and the event shortly afterwards when photons started to travel freely through space rather than constantly being scattered by electrons and protons in plasma is referred to as photon decoupling. The photons that existed at the time of photon decoupling have been propagating ever since, though growing fainter and less energetic, since the expansion of space causes their wavelength to increase over time (and wavelength is inversely proportional to energy according to Planck's relation). This is the source of the alternative term relic radiation. The surface of last scattering refers to the set of points in space at the right distance from us so that we are now receiving photons originally emitted from those points at the time of photon decoupling.

Where did the photons actually come from?
A very good question. We believe that the very early Universe was very hot and dense. At an early enough time it was so hot, ie there was so much energy around, that pairs of particles and anti-particles were continually being created and annihilated again. This annihilation makes pure energy, which means particles of light - photons. As the Universe expanded and the temperature fell the particles and anti-particles (quarks and the like) annihilated each other for the last time, and the energies were low enough that they couldn't be recreated again. For some reason (that still isn't well understood) the early Universe had about one part in a billion more particles than anti-particles. So when all the anti-particles had annihilated all the particles, that left about a billion photons for every particle of matter. And that's the way the Universe is today!

So the photons that we observe in the cosmic microwave background were created in the first minute or so of the history of the Universe. Subsequently they cooled along with the expansion of the Universe, and eventually they can be observed today with a temperature of about 2.73 Kelvin.