Travel of up to two hours now costs €2 (NZ$3.30), while an all-day pass costs €4.
Luxembourg City, the capital of the small Grand Duchy, suffers from some of the worst traffic congestion in the world.
However, even this low fare will end under the plans that will be paid for in part by removing a tax break for commuters.
However, not everyone is convinced about the historic change.
As of this summer, anyone under the age of 20 can travel free in Luxembourg, while an annual "mPass" for commuters.
The policy will save the government money on the collection and policing of ticket purchases.
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.
A study suggested drivers in the capital spent an average of 33 hours in traffic jams in 2016.
Luxembourg Prime Minister Xavier Bettel promised to prioritise the environment.
A free shuttle service is provided for secondary school students between their homes and school and earlier this year free transport was introduced for under 20s.
On top of the transport pledge, the new government is also considering legalising cannabis, and introducing two new public holidays.
There are a few issues to be sorted out before fares are abolished, such as what to do about first- and second-class train compartments.
Sandwiched between France, Belgium and Germany, from which nearly 200,000 people enter it daily to work, the Guardian reports.
The coalition won a razor-thin one-seat majority in the October election.
However, because the Greens gained, the three parties in government have 31 seats in the 60-seat chamber.