The First Law tells you can't create or destroy energy, but you can transform it. The Second Law tells you that this transformation always reduces the amount of useful work you can extract from it. This is how energy is "used up" - it's transformed from a high-grade form (e.g. electricity) to a lower-grade form (e.g. waste heat). Per the Second Law, you can't then go back the opposite direction.
(For a hands-on example, compare the utility of an egg vs. that of a smashed egg, and the amount of effort required to convert one into the other.)
So no, Proof of Work isn't destroying energy, but it's wasting it. It's literally the whole point: you're meant to burn high-grade energy down to waste heat in order to prove you can afford it - there is math to show that trying to make it not wasteful (by e.g. doing some useful math like protein folding, instead of brute-forcing a random hash) creates incentives that defeat the whole system that PoW is supposed to establish.
Waste as a rationale depends on the assumption that the Earth's atmosphere heats up as a result of any excess power generation beyond equilibrium solar radiation, and so there is a limited power budget available to humanity for "useful" work.
Asking the question of whether someone finds it acceptable for PoW to be performed in space or on the Moon is a useful way to discuss crypto when someone just wants to make the climate change argument because it separates the concerns.
Today, this may be increasing fraction of energy generation on the planet. In 50 years, this may be dedicated space satellites beaming energy from the sun. 500 years later, a Dyson swarm constructed for the sole purpose of keeping the blockchain going.
Nah.
So with K3 civilization, we're not talking about dismantling a few planets - but rather dismantling the neighbourhood galaxies.