How To Classify The Composting Industry

BioCycle April 2011, Vol. 52, No. 4, p. 17

Where does the composting industry belong within the North American Industry Classification System? Article examines the options, analyzes alternatives using a common set of criteria and makes a preliminary recommendation. Part II

Andrew C. Kessler, Amy McCrae Kessler and Cara Unterkofler

IN the U.S. today, increasing demand for quality compost and engineered soils from a growing spectrum of users cannot be met with the current processing capacity. Developing the infrastructure of the composting industry to meet these growing market needs will require significant financial investment along with the continued support of local, state and federal government.

As discussed in Part 1 of this article series (see “Stand-Alone Industry Code For Composting,” December 2010), establishing a stand-alone industry code for composting within the North American Industry Classification System (NAICS) is an important step in facilitating industry growth. Quantifying and tracking the sector’s economic contributions (e.g., revenue and employment) through stand-alone NAICS coverage will provide information critical to educating investors, municipalities and policy-makers on its significance and potential.

Requests for changes to the NAICS code are submitted to the Economic Classification Policy Committee (ECPC), which reviews and researches proposed changes before making official recommendations to the Office of Management and Budget (OMB). A request for a stand-alone NAICS code for composting must set forth: 1) evidence that the composting industry is substantial enough to warrant the costs associated with its tracking and reporting; and 2) a recommendation on where within the NAICS code the industry should reside.

The process of gathering economic data and preparing a formal proposal to the ECPC will be described in further detail in Part 3 of this article series, which will put forward an industry action plan and timeline. The goal of Part 2 is to provide a foundation for an industry-wide discussion and debate on the important question of where within NAICS composting should reside.

DIVERSE INDUSTRY
The composting industry provides both products and services. At the front end, composting is an important disposal and treatment service to local communities for recycling organic matter. On the back end, composters manufacture nutrient-rich soil amendments, which are essential ingredients for improved soils, healthy plants and green and sustainable landscapes.

As a result of this diversification, composting appears within several NAICS codes (although never on a stand-alone basis), such as those mentioned in Part 1 of this article series: 325311 Nitrogenous Fertilizer Manufacturing, 325314 Fertilizer (Mixing Only) Manufacturing, 562219 Other Nonhazardous Waste Treatment and Disposal, among others. This diversification also means that a new stand-alone composting code could sit within a variety of economic sectors. The three considered in this article include: 56 Waste Management, 31-33 Manufacturing and 11 Agriculture.

ESTABLISHING EVALUATION CRITERIA
To understand the implications (both benefits and disadvantages) of classification within a sector, we conducted independent research as well as interviews with industry leaders and experts (e.g., composting facility owners and operators, industry consultants, representatives from the ECPC, EPA, state regulators). To provide consistency, each sector was evaluated on the basis of five criteria.

Primary Business Activity Fit: NAICS groups establishments into industries according to similarity in the processes used to produce goods or services. While the NAICS website specifically states, “Ideally, the primary business activity of an establishment is determined by relative share of production costs and/or capital investment,” it also acknowledges that in practice, other variables such as revenue, value of shipments or employment are used as proxies. This criterion is meant to measure how well a sector fits with the primary business activity of a typical composting facility.

Consistency With NAICS Framework: As stated in Part 1, the OMB attempts to maintain time series continuity and cross-border consistency to ensure that trends can be identified and analyzed over time and across country lines. The purpose of this criterion is to evaluate how consistent a proposed new stand-alone NAICS code is to this objective.

Industry Positioning: Where the industry is positioned can influence how composting is viewed by key stakeholders. Affiliation with public policy themes and goals with significant long-term momentum could be advantageous. This criterion is meant to measure how beneficial being classified within a particular sector could be to the industry from an image and branding perspective.

Consistency With Regulatory Perceptions: While NAICS was developed and is maintained for statistical purposes, it is frequently used for various administrative, regulatory, contracting, taxation and other nonstatistical purposes. This criterion is meant to measure how consistent a proposed new stand-alone NAICS code is with how composting is currently perceived and treated by regulators – as well as what regulatory implications might result from the creation of a new stand-alone code.

Consistency With International Classification Schemes: This criterion is meant to measure how consistent a proposed new stand-alone NAICS code for composting is with existing international classification schemes (e.g., the UN International Standard Industrial Classification System (ISIC), the European industry standard classification system, etc.).

THE ANALYSIS
Results of our analysis by those five factors is graphically depicted in Figure 1, as well as discussed in this section by the three sectors evaluated: Waste Management, Manufacturing And Agriculture.

Waste Management
Composters provide an important disposal and treatment service for discarded organic matter, including portions of the MSW stream, biosolids, agricultural waste and industrial organic by-products and waste streams. In exchange for these disposal services, composters charge gate fees, which can and often do represent a significant portion of a composter’s overall revenues. Some composters are vertically integrated and also provide hauling and carting services directly to waste generators for the organic fraction of their waste stream. Therefore, when evaluating what should be considered the primary business activity of composters, the disposal service (including in many cases the pick up and transportation aspect) must be considered.

From a NAICS consistency perspective, composting is currently mentioned within the Waste Management sector as part of 562219 Other Nonhazardous Waste Treatment and Disposal, “…the combined activity of collecting and/or hauling of nonhazardous waste materials within a local area and operating waste treatment or disposal facilities (except landfills, combustors, incinerators and sewer systems, or sewage treatment facilities). Compost dumps are included in this industry.” However, providing disposal services for the purpose of sourcing feedstock is not in and of itself the primary objective of a compost facility. The primary objective is to take these raw materials and convert them into compost and soil amendments. For this reason, composting is also currently recognized and referenced within the manufacturing sector of NAICS.

From an industry positioning perspective, there appear to be few benefits associated with being categorized within the Waste Management sector. First, it would seem advantageous for the composting industry to avoid being grouped with other waste disposal facilities (e.g., landfills and incinerators) that are commonly met with strong “not in my back yard” opposition. While managing waste sustainably is becoming more of a concern to policymakers, even traditional waste management companies strive to deemphasize their waste disposal activities by emphasizing other aspects of their businesses such as resource recovery services.

Because composters handle regulated materials (e.g., putrescible waste, biosolids) their activities are permitted through state and local solid waste management or environmental authorities. Accordingly, it is not surprising that interaction with regulators is primarily associated with that part of a composter’s operations. However, at some point in the compost manufacturing process, the materials no longer possess the characteristics that caused them to be regulated in the first place. The front-end regulation of a composter’s activities, therefore, should not necessarily determine where within NAICS the composting sector should reside.

This sentiment was echoed by a number of regulators we interviewed, including Stephanie Busch, Environmental Program Manager for Georgia’s Environmental Protection Division. “Agencies regulate solid waste handling at compost operations to ensure the protection of the air, water and land,” said Busch. “While compost operations process solid waste, this does not necessarily mean that Waste Management is the appropriate category from a NAICS perspective. NAICS groups businesses by the products they produce or the services they provide, not on how they handle the raw materials that are used in their processes. Compost operations produce a valuable product – I believe the classification code should reflect the manufacturing process and products produced.”

From the standpoint of consistency with international standards, placement of composting within the Waste Management sector does appear to fit reasonably well with several important international classification schemes. For example, within ISIC, composting is prominently mentioned under ISIC 94339 Disposal of Non-Hazardous Waste By Means of Composting; although composting is also mentioned under ISIC 34654 Excreta of Animals Useful for Manure/Fertilizer and Fuel Preparation and ISIC 34659 Fertilizers Not Elsewhere Classified. The United Kingdom’s Standard Industrial Classification of Economic Activities (UKSIC) classifies waste from agriculture, horticulture, aquaculture, forestry, hunting and fishing, food preparation and processing as “waste” and therefore, composting facilities are considered waste disposal and treatment facilities. The same is true for other European countries.

Manufacturing
If the primary business activity of an establishment is determined by relative share of production costs and/or capital investment, then Manufacturing very accurately captures what composting does – produces engineered soils and soil amendments. “Composters create product in the same way that TV manufacturers create TV sets,” explains Craig Coker, a Principal in the firm of Coker Composting & Consulting in Roanoke, Virginia. “They obtain all the parts necessary for a TV (the frame, glass, special bulbs) and then create a TV and sell it. The only difference is that composters’ raw materials are considered ‘waste’ by others and for that reason, composting has been historically thought of as a waste management solution.”

From a NAICS consistency perspective, a new stand-alone code under the Manufacturing sector would be a very good fit. Currently, composting is perhaps best captured within NAICS 325314 Fertilizer (Mixing Only) Manufacturing. A stand-alone code for composting within the Manufacturing sector, therefore, would not represent a material change in its current position. Indeed, it may be as simple as consolidating references to composting into a new code within the Manufacturing sector. In addition, based on our discussions with John Murphy, the Chairman of ECPC, we believe that ECPC considers composting as more appropriately classified within Manufacturing than any other sector.

From an industry positioning perspective, being associated with the Manufacturing sector offers the opportunity for the composting industry to associate itself with a broadly supported public policy objective – encouraging and supporting manufacturing in the U.S. “Positioning composting as a manufacturing industry is attractive to politicians on either side of the aisle, and manufacturing and jobs are important in any economic or political climate,” notes Maureen Walsh, Director of Federal Government Relations at the lobbying firm ML Strategies, LLC. “It’s a position with strong momentum that is likely to grow on a sustainable basis going forward.”

While interaction with regulators is primarily associated with the handling of regulated feedstocks, additional regulatory interaction related to the finished product is required depending upon a composter’s product objectives (e.g., seeking fertilizer or organic certification). Based on our discussions with both compost manufacturers and regulators, establishing a stand-alone composting code within the Manufacturing sector could help minimize situations where composters are pulled into more onerous waste management compliance requirements than necessary.

From the standpoint of consistency with international standards, placement of composting within the Manufacturing sector is less common than placement within the Waste Management sector. However, composting is categorized within the Manufacturing sector by the Australian and New Zealand Standard Industrial Classification (ANZSIC).

Agriculture
Given the importance of compost to water conservation and soil fertility, categorizing composting within the Agriculture sector may seem like a good fit. However, when evaluating the fit within the context of primary business activity, such classification becomes difficult to justify. Although farms increasingly use engineered soils and soil amendments, composters are not typically in the business of growing food, and farming is only one of many users of compost. Commercial composters are, instead, in the business of manufacturing an important product that can enhance soil fertility.

From a NAICS consistency perspective, composting is currently not mentioned within the Agriculture sector. The closest reference to composting within the Agriculture sector is NAICS 1151 Support Activities for Crop Production. However, compost is a product used to prepare soil for crop production not an activity in itself such as “planting and cultivating.”

From an industry positioning perspective, classification under the Agriculture sector could be beneficial to the industry in that Agriculture typically receives strong political and economic support.

In the eyes of regulators, the connection between composting and agriculture is generally limited to on-farm composting operations. These are often relatively small volume operations and accordingly less regulated.

From the standpoint of consistency with other international standards, we were unable to find any examples where composting was classified under Agriculture.

Preliminary Recommendation
Based on our analysis and the criteria used to evaluate the classification options, we believe that a stand-alone NAICS code for composting should reside within the Manufacturing sector for the following reasons:

• Best represents the primary business activity of composting.
• Composting is already well represented within the Manufacturing sector – it just needs to be placed into a stand-alone code.
• Offers an opportunity for the composting sector to be affiliated with a strong and popular public policy theme.
• Could yield regulatory treatment benefits over the long-term.
• Has precedent within other international industry code schemes.

The purpose of this analysis is to stimulate debate and discussion. Stand-alone industry code recognition would be an important positive development for the composting industry and proper placement within the code will optimize the benefits.

Having discussed the importance of a stand-alone code in Part 1 and where within the code composting should reside in Part 2, we will establish a road map to NAICS recognition in Part 3. This road map will include a suggested action plan, timeline and process for facilitating participation of all industry stakeholders. We will also estimate the financial cost associated with this undertaking and suggest ways for the industry to fund this important objective.

Andrew C. Kessler (andrew.kessler@turningearthllc.com) is a Managing Director and Founding Member of Turning Earth, LLC, an organics recycling company focused on producing biogas, compost and sustainable agriculture. Amy McCrae Kessler (amy.kessler@turning earthllc.com) is General Counsel and Founding Member of Turning Earth, LLC. Cara Unterkofler, formerly with Closed Loop Environmental Solutions in Australia, is now seeking opportunities in the D.C. Metro area.

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