I have code like this:

class Possibility(Generic[T]):
    def __init__(self, produce: Callable[[], T]):
        self._produce = produce
    def produce(self) -> T:
        return self._produce()
def reject() -> NoReturn:
    raise RuntimeError
def nothing() -> Possibility[NoReturn]:
    return Possibility(lambda: reject())  # Error here

On the last line I get an error, "Return statement in function which does not return".

This is about the lambda, not about the explicit return statement! If I write return Possibility(reject) it works. (But in the real code, the lambda takes a parameter and reject is a method of that parameter, so I can't do that. My workaround is to turn the lambda into a function, but that's verbose.)

If you can't fix things so that the lambda inherits the "never returns" bit, then how about making the error clearer, e.g. "Lambda never returns"?