diff --git a/src/lightning/data/streaming/dataset.py b/src/lightning/data/streaming/dataset.py
index 47f960b1a9..8bc75f1249 100644
--- a/src/lightning/data/streaming/dataset.py
+++ b/src/lightning/data/streaming/dataset.py
@@ -28,22 +28,6 @@ if _LIGHTNING_CLOUD_GREATER_EQUAL_0_5_50:
     from lightning_cloud.resolver import _resolve_dir
 
 
-def _try_create_cache_dir(create: bool = False) -> Optional[str]:
-    # Get the ids from env variables
-    cluster_id = os.getenv("LIGHTNING_CLUSTER_ID", None)
-    project_id = os.getenv("LIGHTNING_CLOUD_PROJECT_ID", None)
-
-    if cluster_id is None or project_id is None:
-        return None
-
-    cache_dir = os.path.join("/cache/chunks")
-
-    if create:
-        os.makedirs(cache_dir, exist_ok=True)
-
-    return cache_dir
-
-
 class StreamingDataset(IterableDataset):
     """The streaming dataset can be used once your data have been optimised using the DatasetOptimiser class."""
 
@@ -58,9 +42,7 @@ class StreamingDataset(IterableDataset):
         """The streaming dataset can be used once your data have been optimised using the DatasetOptimiser class.
 
         Arguments:
-            name: The name of the optimised dataset.
-            version: The version of the dataset to use.
-            cache_dir: The cache dir where the data would be stored.
+            input_dir: Path to the folder where the input data is stored.
             item_loader: The logic to load an item from a chunk.
             shuffle: Whether to shuffle the data.
             drop_last: If `True`, drops the last items to ensure that
@@ -173,3 +155,11 @@ class StreamingDataset(IterableDataset):
         self.index += 1
 
         return data
+
+
+def _try_create_cache_dir() -> Optional[str]:
+    if "LIGHTNING_CLUSTER_ID" not in os.environ or "LIGHTNING_CLOUD_PROJECT_ID" not in os.environ:
+        return None
+    cache_dir = os.path.join("/cache/chunks")
+    os.makedirs(cache_dir, exist_ok=True)
+    return cache_dir
diff --git a/tests/tests_data/streaming/test_dataset.py b/tests/tests_data/streaming/test_dataset.py
index 3ce2df7064..4dd2af823c 100644
--- a/tests/tests_data/streaming/test_dataset.py
+++ b/tests/tests_data/streaming/test_dataset.py
@@ -12,6 +12,7 @@
 # limitations under the License.
 
 import os
+from unittest import mock
 
 import pytest
 import torch
@@ -47,6 +48,15 @@ def test_streaming_dataset(tmpdir, monkeypatch):
     assert len(dataloader) == 408
 
 
+@mock.patch.dict(os.environ, {"LIGHTNING_CLUSTER_ID": "123", "LIGHTNING_CLOUD_PROJECT_ID": "456"})
+@mock.patch("lightning.data.streaming.dataset.os.makedirs")
+def test_create_cache_dir_in_lightning_cloud(makedirs_mock, tmpdir):
+    # Locally, we can't actually write to the root filesystem with user privileges, so we need to mock the call
+    with pytest.raises(FileNotFoundError, match="`/cache/chunks` doesn't exist"):
+        StreamingDataset(tmpdir)
+    makedirs_mock.assert_called_once_with("/cache/chunks", exist_ok=True)
+
+
 @pytest.mark.parametrize("drop_last", [False, True])
 def test_streaming_dataset_distributed_no_shuffle(drop_last, tmpdir):
     seed_everything(42)