Cardiff council and Rhonda Cynon Taf council were due to pay a combined £1.3m in fines after missing the Welsh Government’s target of recycling 52% in 2013/14.
Individually, Cardiff council was spared an £802,000 fine and Rhondda Cynon Taf council avoided paying out £582,400.
Cardiff recycled 49.67% and Rhonda Cynon Taf missed its target by 2.69%.
Merthyr was also in line for a £224,000, which was also among several fines waived by Natural Resources Minister Carl Sergeant.
“The Natural Resources Minister has made it clear that councils who don’t hit the recycling target will need to demonstrate how they intend to improve and reach future targets or else face penalties”
The total for the council fines would have amounted to £1.8m.
According to Wales Online Sargeant said that although councils needed to be aware fines would follow missed targets, in this instance Cardiff had done enough to demonstrate they intend to improve their figures.
A Welsh Government spokesperson said: “Wales is the fourth best country in Europe at recycling and continues to lead the UK with its recycling targets.
“It’s important, however, that we continue to look for improvement wherever possible and we are working closely with all local authorities in Wales to ensure that best practice is implemented across the board.
“The Natural Resources Minister has made it clear that councils who don’t hit the recycling target will need to demonstrate how they intend to improve and reach future targets or else face penalties.
“In this instance, he is satisfied that these councils have sufficiently demonstrated this and looks forward to seeing a marked improvement in their future recycling performance.”
Cabinet Member for Environment, Councillor Bob Derbyshire, said he was “very pleased” the fine had been waived but warned they remain a real possibility.
Dianne Rees, leader of the Conservative group, said she was surprised by the decision by the minister.
She said, “If they’re serious about having a target, they should be prepared to follow it through.”
Welsh councils will be in line for even bigger fines if they do not hit their next target of recycling 58% of their waste by next year.