I ended up clearing launch.json file and redoing "Run on Cloud Run Emulator" command in vscode.

I entered the key:value pairs in Environment Variables section in "Advanced Service Settings"

This added an env section in launch.json with the values.

            "service": {
                "name": "abc-cloud-run",
                "containerPort": 8080,
                "env": [
                    {
                        "name": "PORT",
                        "value": "8080"
                    },
                    {...}