Colony level represent the stage of development of a colony, ranging from 0 (starting colony) to an almost full-fledged city (9). It depends on the number of colonists as determined by this table:
|# of colonists||colony level|
Effects of level
Seizing or burning a colony gives you 10% of its level as a reputation penalty. Thus, seizing a level 6 colony gives 0.6 reputation. In In Nomine, a colony's trade good is assigned some time after it reaches level 3.
Note that this can be described mathematically by: colony level=floor(# of colonists/100)