According to Blacksmith Institute Toxic pollution poses health risks to over 100 million people. Moreover with the rising fuel prices there is potential demand for alternative fuel vehicles.Keeping that in consideration french motor company MDI started to build air cars.Even though it is a new concept and there is space for large amount of experiments in this field, Companies started production of cars based on this concept as shown by Sun dial list of 2010 air cars.

As it is still emerging technology, I think this is good project for mechanical students.

Compressed Air Car is car which uses compressed air as its fuel. It uses a concept of steam engine, the only difference is , at the place of steam it uses air.

How stuff works website can help you to understand air fuel car concept :
How the Air Cars Works ?

Compressed Air animation :

What is compressed Air ?

Compressed air is air which is kept under a certain pressure, usually greater than that of the atmosphere.

How to compress Air ?

To compress air, we use air compressors. These compressors take air from atmosphere and store it into  cylinder. When the amount of air increase in cylinder , pressure of air started to rise. 

Students of various universities has started to work on this technology, few of there reports in pdf format are given below :
Northeastern university Compressed Air engine : The EOS

American International University : Use Air as Fuel

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Wooden Air Engine :