I've used wood pellet fuel as litter with no problems. I use Canadian Comfort pellets and they have no additives at all, they are just softwood sawdust. The heating and compression procedure completely evaporates the phenols (they are volitile oils that can't remain after heating). The pellets have hardly any scent at all. The company that makes them screens them to remove any debris and also vaccums them to remove any dust. So they are dust free. The company bags the same product as "Kentucky Comfort" for a horse bedding. Any horse people out there know that horses are just as susseptible to respiratory infection as rats are.
I do have to caveat that I only use this as "litter". In the litter bins. My rats bedding is made of fleecies and toweling much more comfy. My rats don't routinely lay in the "litter". Even when I have it as a base on my plastic bottomed cages, I block off a section with bricks to fill with the litter. I just think it doesn't encourage good toilet habits if the litter is all over the bottom of the cage. If anything, I think living in a moldy old house is worse for my rats breathing then the wood pellets ever have been. They really work nicely keeping the odour down mostly because they are so absorbant that they "dry up" feces and urine quickly by sucking the moisture out.