While you're right about the heat thing, the Extended Desktop hack will only allow clamshell mode when an external monitor, keyboard and mouse are plugged in. I got the impression that the OP was wanting to just have it so that it didn't go to sleep when the lid was closed. The best way to achieve that is to open up the machine and remove the magnet that activates the sleep switch. IIRC it's on the left hand of the machine above the optical drive. Unfortunately, getting to it means disassembling basically the whole machine... although it's not too difficult, it's not for the faint of heart!
http://www.ifixit.com/Guide/Mac/iBook-G4-12-Inch/Top-Shield/83/11/
You can actually see the magnet in this photo:
http://www.ifixit.com/Guide/83/images_large/44.jpg
It's the squint little metallic rectangle in the bottom right corner, above the battery bay. It's moved out of place in that photo, it should be aligned with the side of the case IIRC.
Still... I wouldn't recommend it unless you want to risk overheating your iBook.