Actually you need to implement per feature branch deployment. Because development environment use for testing app before QA.
And feature branch deployment is very difficult to implement especialy at the begginging of devops.
May be at start will be enough to use docker-compose to build latest version of developer's application. On their localhost.
RAILS_ENV is en environment variable. Environment variable is a setting which may be read inside the container. Though, environment variables do exist on most of the operating systems https://en.wikipedia.org/wiki/Environment_variable
So the only specific here is that you can set an environment variable for the container and pass some values inside that way. ...