Hand-me-down toys like old socks and towels can make good use of old things, but you have to think about what you're teaching your dog. Dogs are bad at generalizing and differentiation. If a hole-y sock is a toy, all socks are a toy. If an old slipper that is falling apart becomes a toy, all slippers are toys.
Old toys your kids no longer want to play with and are too beaten up to donate create another issue. Besides choking hazards, you are teaching your dog that the kids' toys are his toys, too.
Composting dog waste is tricky and requires an entire set of chemicals to make sure the ground does not get contaminated with parasites or become a breeding ground for them.
There are tons of great tips and products in the following links, but please remember to keep your house rules in mind when reduce-reuse-recycling.
Ten Tips to Help the Environment on Earth Day from raiseagreendog.com
Olive Green Dog -- Hip, modern and eco-friendly dog supplies.
Rekindled Pride -- Two firefighters from Idaho make a difference with dog apparel. Typically, fire departments discard old equipment as waste, but at Rekindled Pride they make all their products with materials worn by the men and women of the fire service.
Mountain Dog Products-- Repurposing old climbing rope as cool eco-friendly leashes. I haven't used one yet, but they will be the next leash I buy!