Step 1: Lithium is handled by the kidney like sodium. It is freely filtered and largely reabsorbed in the proximal tubule. Its level depends on renal handling, not on hepatic metabolism (lithium is not metabolised).
Step 2: Thiazides cause sodium loss and volume contraction. To compensate, the proximal tubule increases reabsorption of sodium and, along with it, lithium. So thiazides raise the tubular reabsorption of lithium, plasma lithium rises, and toxicity (coarse tremors, etc.) appears.
Step 3: Option B is wrong because lithium is not metabolised. Option C does not explain toxicity. So the mechanism is increased tubular reabsorption of lithium (option A).
Management: reduce the lithium dose and monitor levels.
Ref: K. D. Tripathi, 7th Edition, Pages 449, 932.