Bettel, who took office for a second term on Wednesday, made environmental protection a key part of his election campaign.
His Democratic Party will form a government with the left-wing Socialist Workers’ party and the Greens.
Currently, fares are capped at €2 for anything up to two hours of travel, which covers most journeys in the 2,585 km² nation.
Luxembourg City, the landlocked country's capital, is home to around 107,000 but sees 400,000 commuters cross its borders every day to work, causing some of the worst congestion in Europe.
Part of the cost for the initiative will be footed by removing a tax break for commuters.
Luxembourg has previously shown it has a forward-looking attitude towards transport — over the summer, the government introduced free transport for young people under the age of 20.
Secondary school students are also provided free shuttle services between their places of study and homes.
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