OEM aircooled VW heat came from air heat exchangers that took extracted heat from the exhaust gas. Worked terribly when new, and even worse when rust hit: the channels carrying the air from the rear to the front of the vehicle were among the first parts of the body to rust out (at least in Beetles), and if any perforations developed in the heat exchangers you'd get CO going into the cabin.

There were aftermarket gasoline heaters available, which is probably what you're thinking of.