Any open flame inside an enclosure is going to produce CO. High intensity ceramic burners like the ones on Buddy heaters actually incinerate the carbon monoxide when it is pulled in the air mixture because they operate at such a high temperature. There is much less risk of CO production because of this, oxygen depletion is the biggest concern with that style of heater. While it is still unhealthy for people to breathe byproducts of combustion, the Buddy style ceramic burner heaters are much safer than any other open flame, unvented heater.
I would recommend that anyone using an unvented heater buy the ceramic burner style heaters. Also, do not modify them, leave the pilot as it, don't change the case or burner. Another thing to keep in mind is that the ceramic burner will degrade over time. The typical ice fisherman will never get to this point but high intensity heaters that you see in commercial buildings, ones that run 24/7, they will eventually need to be replaced once the burner has degraded. You can tell the burner is going south when it no longer carries a bright orange flame. They WILL produce CO when they get to that point. If, for some reason your Buddy heater isn't burning correctly and there are blue flames coming out of it, the gas/air mixture isn't being burned up within the ceramic, you will be producing CO. I don't think the pilot will stay lit under these conditions though.
