Grand Duchy Prime Minister Xavier Bettel introduced the plan yesterday, December 5, when he took office for his second term, as reported by The Guardian on the same day.
Around 110,000 people live there but another 400,000 commute in for work every day, while almost 200,000 cross the border from neighbouring France, Belgium and Germany. 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.
Mr Bettel was sworn in for a second term on Wednesday, having promised to prioritise environmental issues.
The move will also save on the collection and processing of fares and the policing of ticket purchases.
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Luxembourg is a small European country surrounded by Belgium, France and Germany.
High school students are also provided with free shuttle services between school and their homes.
The national public transport system now costs around €1 billion ($1.13 billion) each year to operate, but only recoups around €30 million ($34 million) in fares, The Independent explained. A decision has yet to be taken on what to do about first- and second-class compartments on trains.
Part of the cost will apparently be covered by removing a tax break for commuters, and will encourage a shift away from the use of private cars in Luxembourg, where traffic congestion is a serious problem, especially in the city centres.
The new government coalition only just scraped through with 31 out of 60 seats in Chamber which might present a challenge when it comes to passing new, out-of-the-box policies and legislation.