Environment bosses are cutting £1.5million from the amount spent to encourage recycling.
Over the last 12 years Herts County Council has given more than £33million back to the 10 district and borough councils.
But on Monday (September 23) it was agreed the amount available would be cut by £500,000 a year, for the next three years.
Those smaller councils, which incluide Dacorum, say they are already being hit financially by a fall in demand for recyclable materials - and warn that the move will damage the relationship with the county council.
But the county council say the move reflects the level of additional savings the county council is required to make, with £19.9million of savings still needed in time for the 2020-21 budget.
At the meeting executive member for community safety and waste management Cllr Terry Hone said they had needed to look at what they could contribute towards the funding required “to maintain the high level of care currently adults and children in our community”.
He suggested that not every council had always used the funds from the scheme, as intended, to increase their recycling rates.
A written response from Welwyn Hatfied’s corporate director Ka Ng - on behalf of all the district and borough councils - said the planned reduction came as the districts were suffering “significant budget pressures” from falling demand for recyclate materials.
She pointed to investments by the districts that would reduce the waste going to landfill and save the county council millions of pounds in disposal costs.
And she warned that this would not help to reduce the environmental impact across the county.
Last year the cost of waste disposal to the county council was £44.1million. By 2022/23 it is expected to increase by a further £8million. >How the scheme works:
The reward scheme - known as the ‘alternative financial model’ - re-distribues savings accrued to the county council, in its role as waste collection authority, as a direct result of better kerbside recycling practices of the districts and boroughs.
It is designed to encourage district and borough council to promote recycling, in their role as waste collection authorities.
Ten per cent of these savings are kept by the county council, with the rest shared according to the size of the authority and the ‘in-year performance’ - calculating the savings made by each authority compared to the year before.
Similar reward schemes do operate in other areas of the country with two-tier authorities, where the districts and boroughs are responsible for waste collection and the county council for disposal.
But the Hertfordshire scheme, which last year re-distributed more than £4million, is said to be one of the most generous.
Last year £4.147million was passed to districts and boroughs - with £397,977 for Broxbourne; £442,948 for Dacorum; £326,582 for East Herts; £330,141 for Hertsmere; £577,153 for North Herts; £836,469 for St Albans; £236,755 for Stevenage; £353,699 for Three Rivers; £346,312 for Watford; and £299,437 for Welwyn Hatfield.
The biggest payment of £836,469 was made to St Albans; the smallest of £236,755 to Stevenage.
Over the past three years the county council has kept back £1million from the scheme - at a rate of £333,000 a year.