However, campaigners say other authorities could use the technology to pile charges onto those who throw away the most - often those with large families.
"If local authorities have no intention to monitor our waste then they should end the surreptitious installation of these bin microchips," said Big Brother Watch director Alex Deane.
The group's report, Lifting the Lid, follows a a series of requests under the Freedom of Information Act to identify councils using the microchips.
"Councils are waiting until the public aren't watching to begin surveillance on our waste habits, intruding into people's private lives and introducing punitive taxes on what we throw away," said Mr Deane.
Borough councillor Liam Maxwell said penalties did not work.
"Incentives and helping people make the right decision of whether to put some recycling in their landfill bin, or in their recycling bin, is where we're making the behavioural change for this."
A spokesman for the Department for the Environment, Farming and Rural Affairs said it was up to councils - not the government - whether they used microchips.
"Microchips do not monitor what goes into the bin and this is not about 'spying' on people or fining them," he said.
"Britain cannot keep on sending waste to landfill, and it is important that councils work with communities to reduce waste, reuse it where possible, and recycle more."
And Corinne Thomson, of the Local Government Association, which represents councils in England and Wales, said: "What microchips allow councils to do is reduce the cost of collecting the bins and, ultimately, keep Council Tax down."
She said the technology helped councils to establish whether people are recycling and offer incentives to do so.
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