Found this old thread while Googling, but wanted to update those about this. Blue Silica Gel is indeed something that has been shown to cause cancer and is bad for the environment. In the UK they have listed this as a Hazardous Material and should be disposed of as Hazardous material.
Originally Posted by PeterB
Now what I wanted to update is, I found a supplier (actually 2 maybe 3 now) that have replaced the "Blue" Silica Gel with a reformulated Orange Indicating Silica Gel which does NOT contain the Cobalt Chloride as is found in the Blue Silica Gel. You can read a bit more about it under question 7 at this FAQ page: http://www.silicagelpackets.com/faqs/ from a site that has the Orange Indicating Silica Gel.
So, there is at least a safe alternative out there if anyone needs.