You may be tempted to use MDF (medium density fiberboard) on walls rather than drywall to avoid the dust when sanding the joint compound. Indeed, MDF would make a nice, smooth wall surface, and it's often used for painted panels in wainscoting. It's much more dimensionally stable than wood. But it still moves. Relative humidity fluctuations could cause a 4-ft. panel to expand and contract as much as 1/8 in. This would open a crack somewhere, even if you glued and splined the edges of panels to one another.
Drywall is a better choice for your walls, because it moves little with humidity changes. To limit the dust, consider wet-sanding the joints. Tape with care so you don't have to do much sanding. Then buy a big flat drywall sponge (inexpensive; at home centers),wet and wring it out, and simply wipe smooth any minor flaws. You probably won't have to use the coarse side of the sponge unless you have unusually rough areas.