Bettel, who took office for a second term on Wednesday, made environmental protection a key part of his election campaign.
Luxembourg's capital is home to about 110,000 people while a further 400,000 commute into the city to work daily.
Some places around the world offer free transport in a bid to reduce traffic congestion, and in some U.S. counties the bus system is free, but no other nation has eliminated fares from its entire transport network.
A study suggested that drivers in the capital spent an average of 33 hours in traffic jams in 2016.
Luxembourg is a small European country surrounded by Belgium, France and Germany.
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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.
On top of the transport pledge, the new government is also considering legalising cannabis, and introducing two new public holidays.
Secondary school students can use free shuttles between their institution and their home.
The finer details of the proposal are still to be determined - including what to do about first and second-class carriages on trains. On top of that, there's an extremely low far of only €2 (S$3.1) for two hours of travel, which in such a small country covers nearly all journeys.
The Christian Social People's Party (CSV) - which was led for 19 years by European Union chief executive Jean-Claude Juncker - remained the largest party in parliament, but lost seats, as did the LSAP and the Democratic Party.