Three local authorities which missed a recycling target last year are to avoid fines of more than £600,000.
Newport, Blaenau Gwent and Torfaen all missed a target to recycle 58% of waste by 2015/16.
But the Welsh Government has now decided not to penalise them, saying it expects their performance to improve.
Opposition AMs criticised ministers, however, with one suggesting the credibility of the government's strategy has been "lost".
Ministers have set tough targets for the amount of waste authorities should recycle, reuse or compost, with the threat of fines to those councils that do not meet them.
In 2015/16 the target was set at 58%, which 19 of Wales' 22 councils met or exceeded, with Wales as a whole recycling 60.2% of waste.
But Newport and Torfaen both fell just short at 57% each, while Blaenau Gwent's performance was the lowest at 49%.
Based on a penalty of £200 per tonne that the target was missed by, Blaenau Gwent council said it would have been fined £573,000 while Torfaen council said its fine would have been £49,800.
Newport council could not provide a figure at this time.
The Welsh Government - which set the first statutory recycling targets in the UK - said "significant improvements" are expected for the authorities' recycling performance in 2016/17.
"As such, a decision was taken not to issue penalties on this occasion," a spokeswoman said, adding fines could still be imposed in future if local authorities continue to miss targets.
Recent provisional figures for the year to September 2016 showed Newport and Torfaen was now recycling 60% and 63% of waste respectively.
Blaenau Gwent indicated unverified figures showed this year's rate for the authority had risen to approximately 57%.
It is not the first time the Welsh Government has decided not to fine authorities for missing recycling targets.
In 2015, it waived penalties for Cardiff and Rhondda Cynon Taf.
In forthcoming years, the targets will get tougher to meet - with authorities expected to recycle 64% of waste in 2020 and 70% in 2025.
Rebecca Colley-Jones, director of consultancy Ynys Resources, said Blaenau Gwent had improved its performance over the last few years.
She said: "If the purpose of the fines is to get them to... achieve those targets, they are certainly doing the right thing, not doing the wrong thing."
But Simon Thomas, Plaid Cymru environment spokesman, said: "It seems to me that the credibility of what the Welsh Government is trying to achieve is clearly lost when you go through two cycles of target setting and two cycles of failure by certain authorities, and you just don't follow through on it."
UKIP local government spokesman Gareth Bennett, said the policy was "ill-conceived" and that the imposition of fines "would only serve to hit local authorities and council tax payers in the pocket".
"There must be an incentive for the underperforming councils to improve recycling rates," said Conservative environment spokesman David Melding, "and the Welsh Government is in danger of appearing to be all bark and no bite".
A Welsh Liberal Democrat spokesman said: "The Welsh Government cannot possibly hope to meet recycling targets if councils know they'll get away with missing their recycling targets by sweet talking the government."
Meanwhile, the Wales Green Party suggested that under-funding of councils had led to authorities not meeting targets.
In response, a Welsh Labour Government spokesman said: "Wales is leading the way on recycling and according to a recent report by Resource we are the third-best recycling nation in the world."
He added the administration is "well on course" to meet its 70% target for 2025.
Duncan Smith, Torfaen chief officer for neighbourhood services, said smaller wheelie bins meant the authority was seeing a "significant increase" in recycling and that it was "on target to achieve more than 63% recycling for 2016/17".
Newport council added it was grateful the Welsh Government had recognised "the considerable efforts that are going into reducing waste and increasing recycling" in the city.