Natural gas, as a cleaner fossil fuel energy resource, is playing an increasingly important role in the future energy mix to achieve emission reduction target globally. In this study, a new method based on the external cost is developed to identify an optimal solution for natural gas distribution. China is selected for a case study. Both the economic cost and the external cost of pollutant emissions have been considered. The provincial distribution of natural gas and other energy resources is optimized with the aim to minimize both economic and external costs. Results show that the supply of natural gas should be prioritized for Beijing, Tianjin and Shanghai, owing to higher external costs and the optimized distribution can reduce the overall external cost by 4% in China. The optimization of natural gas distribution will also influence CO2 emissions, therefore, the determination of the reduction target for each province should consider the external cost. Sensitivity study also shows that the minimum energy demand, the maximum natural gas supply and the minimum natural gas demand are the key parameters that impact the optimized distribution for each province. (C) 2017 Elsevier Ltd. All rights reserved.