Optimal sitting and sizing of shunt capacitor banks at the distribution networks for the purpose of power quality improvement is drawn much attention of electric power utilities in the last decades. Determining the optimal number, location and sizing of capacitor using Bee Colony Optimization algorithm (BCO) is being presented in this paper. The BCO algorithm is a new population based meta-heuristic approach exalted by intelligent foraging behaviour of honey bee swarm. The objectives include improvement of reliability and voltage profile and minimization of line losses. Also effect of capacitor installation on reducing carbon dioxide emissions of the grid has been considered in the objective function. This method has been executed on a 33-bus test system and comparative studies are conducted before and after capacitor installation in the test system. Results illustrate significant losses and carbon dioxide emission reduction and voltage profile and reliability improvement with appropriate presence of capacitor banks in distribution system.