Deployment of autonomous vehicles requires an extensive evaluation of developed control, perception, and localization algorithms. Therefore, increasing the implemented SAE level of autonomy in road vehicles requires extensive simulations and verifications in a realistic simulation environment before proving ground and public road testing. The level of detail in the simulation environment helps ensure the safety of a real-world implementation and reduces algorithm development cost by allowing developers to complete most of the validation in the simulation environment. Considering sensors like camera, LiDAR, radar, and V2X used in autonomous vehicles, it is essential to create a simulation environment that can provide these sensor simulations as realistically as possible. While sensor simulations are of crucial importance for perception algorithm development, the simulation environment will be incomplete for the simulation of holistic AV operation without being complemented by a realistic vehicle dynamic model and traffic co-simulation. Therefore, this paper investigates existing simulation environments, identifies use case scenarios, and creates a co-simulation environment to satisfy the simulation requirements for autonomous driving function development using the Carla simulator based on the Unreal game engine for the environment, Sumo or Vissim for traffic co-simulation, Carsim or Matlab/Simulink for vehicle dynamics co-simulation and Autoware or the authors’ or users’ own routines for autonomous driving algorithm co-simulation. As a result of this work, a model-based vehicle dynamics simulation with realistic sensor simulation and traffic simulation is presented. A sensor fusion methodology is implemented in the created simulation environment as a use case scenario. The results of this work will be a valuable resource for researchers who need a comprehensive co-simulation environment to develop connected and autonomous driving algorithms.